FORM
10-Q
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
|
R
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF
1934
|
For
the quarterly period ended September 27, 2009
OR
|
|
£
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF
1934
|
|
For
the transition period from
|
|
to
|
Commission
File No. 1-11257
CHECKPOINT
SYSTEMS, INC.
(Exact
name of Registrant as specified in its Articles of Incorporation)
|
Pennsylvania
|
|
22-1895850
|
|
(State
of Incorporation)
|
|
(IRS
Employer Identification No.)
|
|
|
|
|
|
101
Wolf Drive, PO Box 188, Thorofare, New Jersey
|
|
08086
|
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
|
|
|
|
|
|
856-848-1800
|
|
|
|
(Registrant’s
telephone number, including area code)
|
|
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes
R
No
£
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.05 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes
o
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.:
|
Large
accelerated filer
o
|
|
Accelerated
filer
þ
|
|
Non-accelerated
filer
o
|
|
Smaller
reporting company
o
|
|
(Do
not check if a smaller reporting
company)
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
£
No
R
APPLICABLE
ONLY TO CORPORATE ISSUERS:
As of
October 28, 2009, there were 39,000,116 shares of the Company’s Common Stock
outstanding.
CHECKPOINT
SYSTEMS, INC.
FORM
10-Q
Table of
Contents
CONSOLIDATED
BALANCE SHEETS
(Unaudited)
(amounts
in thousands)
|
|
September
27,
2009
|
December
28,
2008*
|
|
ASSETS
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
Cash
and cash equivalents
|
$
114,792
|
$
132,222
|
|
Restricted
cash
|
1,161
|
—
|
|
Accounts
receivable, net of allowance of $16,391 and $18,414
|
172,191
|
196,664
|
|
Inventories
|
97,683
|
102,122
|
|
Other
current assets
|
36,103
|
41,224
|
|
Deferred
income taxes
|
21,731
|
22,078
|
|
|
|
|
|
Total
Current Assets
|
443,661
|
494,310
|
|
|
|
|
|
REVENUE
EQUIPMENT ON OPERATING LEASE, net
|
2,015
|
2,040
|
|
PROPERTY,
PLANT, AND EQUIPMENT, net
|
110,646
|
86,735
|
|
GOODWILL
|
249,857
|
235,532
|
|
OTHER
INTANGIBLES, net
|
106,982
|
113,755
|
|
DEFERRED
INCOME TAXES
|
41,939
|
36,182
|
|
OTHER
ASSETS
|
24,378
|
17,162
|
|
|
|
|
|
TOTAL
ASSETS
|
$
979,478
|
$
985,716
|
|
|
|
|
|
LIABILITIES
AND EQUITY
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
Short-term
borrowings and current portion of long-term debt
|
$ 19,051
|
$ 11,582
|
|
Accounts
payable
|
53,407
|
63,872
|
|
Accrued
compensation and related taxes
|
30,483
|
32,056
|
|
Other
accrued expenses
|
44,749
|
54,123
|
|
Income
taxes
|
18,132
|
8,066
|
|
Unearned
revenues
|
11,833
|
11,005
|
|
Restructuring
reserve
|
703
|
4,522
|
|
Accrued
pensions — current
|
4,506
|
4,305
|
|
Other
current liabilities
|
20,432
|
22,027
|
|
|
|
|
|
Total
Current Liabilities
|
203,296
|
211,558
|
|
|
|
|
|
LONG-TERM
DEBT, LESS CURRENT MATURITIES
|
108,712
|
133,704
|
|
ACCRUED
PENSIONS
|
81,914
|
77,623
|
|
OTHER
LONG-TERM LIABILITIES
|
42,487
|
47,928
|
|
DEFERRED
INCOME TAXES
|
10,799
|
9,665
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
CHECKPOINT
SYSTEMS, INC. STOCKHOLDERS’ EQUITY:
|
|
|
|
Preferred
stock, no par value, 500,000 shares authorized, none
issued
|
—
|
—
|
|
Common
stock, par value $.10 per share, 100,000,000 shares authorized,
issued
43,032,749
and 42,747,808
|
4,303
|
4,274
|
|
Additional
capital
|
388,394
|
381,498
|
|
Retained
earnings
|
181,475
|
173,912
|
|
Common
stock in treasury, at cost, 4,035,912 and 4,035,912 shares
|
(71,520)
|
(71,520)
|
|
Accumulated
other comprehensive income, net of tax
|
28,952
|
16,150
|
|
|
|
|
|
Total
Checkpoint Systems, Inc. Stockholders’ Equity
|
531,604
|
504,314
|
|
NONCONTROLLING
INTERESTS
|
666
|
924
|
|
TOTAL
EQUITY
|
532,270
|
505,238
|
|
|
|
|
|
TOTAL
LIABILITIES AND EQUITY
|
$
979,478
|
$
985,716
|
|
|
|
|
|
*
|
Derived
from the Company’s audited consolidated financial statements at December
28, 2008.
|
|
|
See
accompanying notes to the condensed consolidated financial
statements.
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
(amounts
in thousands, except per share
data)
|
|
|
Quarter
(13
weeks) Ended
|
|
Nine
Months
(39
weeks) Ended
|
|
|
September
27,
2009
|
September
28,
2008
|
|
September
27,
2009
|
September
28,
2008
|
|
|
|
|
|
|
|
|
Net
revenues
|
$
194,078
|
$
233,995
|
|
$
534,941
|
$
679,815
|
|
Cost
of revenues
|
109,404
|
136,364
|
|
306,046
|
397,764
|
|
|
|
|
|
|
|
|
Gross
profit
|
84,674
|
97,631
|
|
228,895
|
282,051
|
|
Selling,
general, and administrative expenses
|
66,210
|
73,865
|
|
189,724
|
223,695
|
|
Research
and development
|
4,874
|
5,297
|
|
14,811
|
16,267
|
|
Restructuring
expense
|
153
|
848
|
|
1,212
|
4,848
|
|
Litigation
settlement
|
—
|
467
|
|
1,300
|
467
|
|
Other
operating income
|
—
|
968
|
|
—
|
968
|
|
|
|
|
|
|
|
|
Operating
income
|
13,437
|
18,122
|
|
21,848
|
37,742
|
|
Interest
income
|
419
|
677
|
|
1,340
|
1,975
|
|
Interest
expense
|
1,878
|
1,522
|
|
5,063
|
4,008
|
|
Other
(loss) gain, net
|
(523)
|
(1,512)
|
|
296
|
(2,118)
|
|
|
|
|
|
|
|
|
Earnings
before income taxes
|
11,455
|
15,765
|
|
18,421
|
33,591
|
|
Income
taxes
|
8,884
|
2,999
|
|
11,190
|
1,778
|
|
|
|
|
|
|
|
|
Net
earnings
|
2,571
|
12,766
|
|
7,231
|
31,813
|
|
Less:
(Loss) attributable to noncontrolling interests
|
(68)
|
(10)
|
|
(332)
|
(117)
|
|
|
|
|
|
|
|
|
Net
earnings attributable to Checkpoint Systems, Inc.
|
$ 2,639
|
$ 12,776
|
|
$ 7,563
|
$ 31,930
|
|
|
|
|
|
|
|
|
Net
earnings attributable to Checkpoint Systems, Inc. per Common
Shares:
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
$ .07
|
$ .33
|
|
$ .19
|
$ .81
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
$ .07
|
$ .32
|
|
$ .19
|
$ .79
|
See
accompanying notes to the condensed consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF EQUITY
(Unaudited)
(amounts
in thousands)
|
|
Checkpoint
Systems, Inc. Stockholders
|
|
|
|
|
Common
Stock
|
Additional
|
Retained
|
Treasury
Stock
|
Accumulated
Other Comprehensive
|
Noncontrolling
|
Total
|
|
|
Shares
|
Amount
|
Capital
|
Earnings
|
Shares
|
Amount
|
Income
|
Interests
|
Equity
|
|
Balance,
December 30, 2007
|
41,837
|
$
4,183
|
$
360,684
|
$
203,717
|
2,036
|
$
(20,621)
|
$ 40,365
|
$ 977
|
$
589,305
|
|
Net
(loss)
|
|
|
|
(29,805)
|
|
|
|
(123)
|
(29,928)
|
|
Exercise
of stock-based compensation and awards released
|
911
|
91
|
8,914
|
|
|
|
|
|
9,005
|
|
Tax
benefit on stock-based compensation
|
|
|
2,121
|
|
|
|
|
|
2,121
|
|
Stock-based
compensation expense
|
|
|
7,096
|
|
|
|
|
|
7,096
|
|
Deferred
compensation plan
|
|
|
2,683
|
|
|
|
|
|
2,683
|
|
Repurchase
of common stock
|
|
|
|
|
2,000
|
(50,899)
|
|
|
(50,899)
|
|
Amortization
of pension plan actuarial losses, net of tax
|
|
|
|
|
|
|
72
|
|
72
|
|
Change
in realized and unrealized gains on derivative hedges, net of
tax
|
|
|
|
|
|
|
880
|
|
880
|
|
Unrealized
gain adjustment on marketable securities, net of tax
|
|
|
|
|
|
|
(16)
|
|
(16)
|
|
Recognized
loss on pension, net of tax
|
|
|
|
|
|
|
(169)
|
|
(169)
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
(24,982)
|
70
|
(24,912)
|
|
Balance,
December 28, 2008
|
42,748
|
$
4,274
|
$
381,498
|
$
173,912
|
4,036
|
$
(71,520)
|
$ 16,150
|
$ 924
|
$
505,238
|
|
Net
earnings
|
|
|
|
7,563
|
|
|
|
(332)
|
7,231
|
|
Exercise
of stock-based compensation and awards released
|
285
|
29
|
834
|
|
|
|
|
|
863
|
|
Tax
shortfall on stock-based compensation
|
|
|
(439)
|
|
|
|
|
|
(439)
|
|
Stock-based
compensation expense
|
|
|
5,279
|
|
|
|
|
|
5,279
|
|
Deferred
compensation plan
|
|
|
1,222
|
|
|
|
|
|
1,222
|
|
Amortization
of pension plan actuarial losses, net of tax
|
|
|
|
|
|
|
90
|
|
90
|
|
Change
in realized and unrealized gains on derivative hedges, net of
tax
|
|
|
|
|
|
|
(2,265)
|
|
(2,265)
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
14,977
|
74
|
15,051
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
September 27, 2009
|
43,033
|
$
4,303
|
$
388,394
|
$
181,475
|
4,036
|
$
(71,520)
|
$ 28,952
|
$ 666
|
$
532,270
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to the condensed consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(amounts
in thousands)
|
|
Quarter
(13
weeks) Ended
|
|
Nine
Months
(39
weeks) Ended
|
|
|
September
27,
2009
|
September
28,
2008
|
|
September
27,
2009
|
September
28,
2008
|
|
Net
earnings
|
$ 2,571
|
$
12,766
|
|
$
7,231
|
$
31,813
|
|
Amortization
of pension plan actuarial losses, net of tax
|
31
|
24
|
|
90
|
73
|
|
Change
in realized and unrealized gains on derivative hedges, net of
tax
|
(554)
|
1,131
|
|
(2,265)
|
1,314
|
|
Unrealized
gain adjustment on marketable securities, net of tax
|
—
|
—
|
|
—
|
(16)
|
|
Foreign
currency translation adjustment
|
13,177
|
(27,510)
|
|
15,051
|
(1,944)
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss)
|
15,225
|
(13,589)
|
|
20,107
|
31,240
|
|
Comprehensive
(loss) attributable to noncontrolling interests
|
(28)
|
(12)
|
|
(258)
|
(87)
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss) attributable to Checkpoint Systems, Inc.
|
$
15,197
|
$
(13,601)
|
|
$
19,849
|
$
31,153
|
|
|
|
|
|
|
|
See
accompanying notes to the condensed consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
(amounts
in thousands)
|
Nine
Months Ended (39 Weeks)
|
September
27,
2009
|
September
28,
2008
|
|
Cash
flows from operating activities:
|
|
|
|
Net
earnings
|
$ 7,231
|
$ 31,813
|
|
Adjustments
to reconcile net earnings to net cash provided by operating
activities:
|
|
|
|
Depreciation
and amortization
|
23,357
|
22,924
|
|
Deferred
taxes
|
(4,865)
|
(6,485)
|
|
Stock-based
compensation
|
5,279
|
5,874
|
|
Provision
for losses on accounts receivable
|
—
|
4,818
|
|
Excess
tax benefit on stock compensation
|
12
|
(2,176)
|
|
Gain
on sale of Czech Republic subsidiary
|
—
|
(968)
|
|
Loss
(gain) on disposal of fixed assets
|
198
|
(20)
|
|
Asset
impairment
|
—
|
401
|
|
(Increase)
decrease in current assets, net of the effects of acquired
companies:
|
|
|
|
Accounts
receivable
|
31,235
|
1,281
|
|
Inventories
|
9,328
|
(4,077)
|
|
Other
current assets
|
5,801
|
2,825
|
|
Increase
(decrease) in current liabilities, net of the effects of acquired
companies:
|
|
|
|
Accounts
payable
|
(13,594)
|
(19,500)
|
|
Income
taxes
|
10,103
|
(154)
|
|
Unearned
revenues
|
484
|
(459)
|
|
Restructuring
reserve
|
(3,469)
|
(538)
|
|
Other
current and accrued liabilities
|
(16,900)
|
(8,561)
|
|
|
|
|
|
Net
cash provided by operating activities
|
54,200
|
26,998
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
Acquisition
of property, plant, and equipment and intangibles
|
(10,331)
|
(12,287)
|
|
Acquisitions
of businesses, net of cash acquired
|
(25,476)
|
(41,437)
|
|
Other
investing activities
|
97
|
142
|
|
|
|
|
|
Net
cash used in investing activities
|
(35,710)
|
(53,582)
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
Proceeds
from stock issuances
|
863
|
9,006
|
|
Excess
tax benefit on stock compensation
|
(12)
|
2,176
|
|
Proceeds
from short-term debt
|
11,215
|
9,951
|
|
Payment
of short-term debt
|
(12,137)
|
(3,598)
|
|
Net
change in factoring and bank overdrafts
|
(4,850)
|
—
|
|
Proceeds
from long-term debt
|
93,742
|
99,491
|
|
Payment
of long-term debt
|
(124,850)
|
(66,034)
|
|
Purchase
of treasury stock
|
—
|
(50,899)
|
|
Debt
issuance costs
|
(3,903)
|
—
|
|
|
|
|
|
Net
cash (used in) provided by financing activities
|
(39,932)
|
93
|
|
|
|
|
|
Effect
of foreign currency rate fluctuations on cash and cash
equivalents
|
4,012
|
1,514
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
(17,430)
|
(24,977)
|
|
Cash
and cash equivalents:
|
|
|
|
Beginning
of period
|
132,222
|
118,271
|
|
|
|
|
|
End
of period
|
$ 114,792
|
$ 93,294
|
|
|
|
|
See
accompanying notes to condensed consolidated financial statements.
CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. BASIS OF
ACCOUNTING
The
consolidated financial statements include the accounts of Checkpoint Systems,
Inc. and its majority-owned subsidiaries (Company). All inter-company
transactions are eliminated in consolidation. The consolidated financial
statements and related notes are unaudited and do not contain all disclosures
required by generally accepted accounting principles in annual financial
statements. Refer to our Annual Report on Form 10-K for the fiscal year ended
December 28, 2008 for the most recent disclosure of the Company’s accounting
policies.
The
consolidated financial statements include all adjustments, consisting only of
normal recurring adjustments, necessary to state fairly our financial position
at September 27, 2009 and December 28, 2008 and our results of operations for
the thirteen and thirty-nine weeks ended September 27, 2009 and September 28,
2008 and cash flows for the thirty-nine week periods ended September 27, 2009
and September 28, 2008. The results of operations for the interim periods should
not be considered indicative of results to be expected for the full year. We
have evaluated subsequent events through November 5, 2009, the date the
financial statements were issued.
Certain
reclassifications and retrospective adjustments have been made to prior period
information to conform to current period presentation. These reclassifications
and retrospective adjustments result from our adoption of an accounting standard
codified within Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification™ (“ASC”) 810, “Consolidation,” related to noncontrolling
interests, and our change in segment reporting to conform to our current
management structure, respectively.
Out
of Period Adjustments
During
the first quarter of 2008, we identified errors in our financial statements for
the fiscal years ended 1999 through fiscal year 2007. These errors primarily
related to the accounting for a deferred compensation arrangement. We
incorrectly accounted for a deferred payment arrangement to a former executive
of the Company. These deferred payments should have been appropriately accounted
for in prior periods. We corrected these errors during the first quarter of
2008, which had the effect of increasing selling, general and administrative
expenses by $1.4 million and reducing net income by $0.8 million. These
prior period errors individually and in the aggregate are not material to the
financial results for previously issued annual financial statements or
previously issued interim financial data prior to fiscal 2007 as well as the
nine months ended September 28, 2008. As a result, we have not restated our
previously issued annual financial statements or previously issued interim
financial data.
Stock
Repurchase Program
During
the first half of 2008, we executed our previously approved stock repurchase
program in which we are authorized to purchase up to two million shares of the
Company’s common stock. In total, we repurchased two million shares of our
common stock at an average cost of $25.42, spending a total of
$50.9 million. Prior to 2008, no shares were repurchased under this plan.
As of September 27, 2009, no shares remain available for purchase under the
current program. Common stock obtained by the Company through the repurchase
program has been added to our treasury stock holdings.
Subsequent
Events
During
the second quarter of 2009, we adopted a standard codified within ASC 855,
“Subsequent Events,” which establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. The adoption of
this standard did not have a material impact on our consolidated results of
operations and financial condition. We evaluated events or transactions that
occurred after September 27, 2009 and through November 5, 2009, the
date the financial statements were issued. During this period no events required
recognition or disclosure in the consolidated financial statements of the
Company.
Noncontrolling
Interests
On
December 29, 2008, we adopted a standard codified within ASC 810,
“Consolidation,” which establishes accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. This standard clarifies that a noncontrolling interest should be
reported as equity in the consolidated financial statements and requires net
income attributable to both the parent and the noncontrolling interest to be
disclosed separately on the face of the consolidated statement of income. The
presentation and disclosure requirements of this standard require retrospective
application to all prior periods presented.
On
July 1, 1997, Checkpoint Systems Japan Co. Ltd. (Checkpoint Japan), a
wholly-owned subsidiary of the Company, issued newly authorized shares to
Mitsubishi Materials Corporation (Mitsubishi) in exchange for cash. In
February 2006, Checkpoint Japan repurchased 26% of these shares from
Mitsubishi in exchange for $0.2 million in cash. The remaining shares held
by Mitsubishi represent 15% of the adjusted outstanding shares of Checkpoint
Japan. We have classified noncontrolling interests as equity on our consolidated
balance sheets as of September 27, 2009 and December 28, 2008 and
presented net income attributable to noncontrolling interests separately on our
consolidated statements of operations for the three and nine months ended
September 27, 2009 and September 28, 2008. No changes in the ownership
interests of Checkpoint Japan occurred during the nine months ended
September 27, 2009.
Warranty
Reserves
We
provide product warranties for our various products. These warranties vary in
length depending on product and geographical region. We establish our warranty
reserves based on historical data of warranty transactions.
The
following table sets forth the movement in the warranty reserve which is located
in the Other Accrued Expenses section of our Consolidated Balance
Sheet:
(amounts
in thousands)
|
Thirty-nine
weeks ended
|
September
27,
2009
|
|
Balance
at beginning of year
|
$ 8,403
|
|
Accruals
for warranties issued
|
3,061
|
|
Settlements
made
|
(5,100)
|
|
Foreign
currency translation adjustment
|
203
|
|
|
|
|
Balance
at end of period
|
$ 6,567
|
Recently
Adopted Accounting Standards
In
September 2009, we adopted ASC 105-10-05, which provides for the FASB Accounting
Standards Codification™ (the “Codification”) to become the single official
source of authoritative, nongovernmental U.S. generally accepted accounting
principles (“GAAP”) to be applied by nongovernmental entities in the preparation
of financial statements in conformity with GAAP. The Codification does not
change GAAP, but combines all authoritative standards into a comprehensive,
topically organized online database. ASC 105-10-05 explicitly recognizes rules
and interpretative releases of the Securities and Exchange Commission (SEC)
under federal securities laws as authoritative GAAP for SEC registrants.
Subsequent revisions to GAAP will be incorporated into the ASC through
Accounting Standards Updates (ASU). ASC 105-10-05 is effective for
interim and annual periods ending after September 15, 2009, and was effective
for us in the third quarter of 2009. The adoption of ASC 105-10-05 impacted the
Company’s financial statement disclosures, as all references to authoritative
accounting literature were updated to and in accordance with the Codification.
Our adoption of ASC 105-10-05 did not have a material impact on our consolidated
results of operations and financial condition.
In
December 2007, the FASB issued an accounting standard codified within ASC
805, “Business Combinations” which changed the accounting for business
acquisitions. Under this standard, business combinations continue to
be required to be accounted for at fair value under the acquisition method of
accounting, but the standard changed the method of applying the acquisition
method in a number of significant aspects. Acquisition costs will generally be
expensed as incurred; noncontrolling interests will be valued at fair value at
the acquisition date; in-process research and development will be recorded at
fair value as an indefinite-lived intangible asset at the acquisition date,
until either abandoned or completed, at which point the useful lives will be
determined; restructuring costs associated with a business combination will
generally be expensed subsequent to the acquisition date; and changes in
deferred tax asset valuation allowances and income tax uncertainties after the
acquisition date generally will affect income tax expense. The standard is
effective on a prospective basis for all business combinations for which the
acquisition date is on or after the beginning of the first annual period
subsequent to December 15, 2008, with the exception of the accounting for
valuation allowances on deferred taxes and acquired tax contingencies. The
standard amends the accounting for income taxes such that adjustments made to
valuation allowances on deferred taxes and acquired tax contingencies associated
with acquisitions that closed prior to the effective date of the standard would
also apply the provisions of the new standard. Disclosure requirements were also
expanded to enable the evaluation of the nature and financial effects of the
business combination. For the Company, the standard is effective for business
combinations occurring after December 28, 2008. Adoption of the standard
did not have a significant impact on our financial position and results of
operations; however, any business combination entered into after the adoption
may significantly impact our financial position and results of operations when
compared to acquisitions accounted for under prior GAAP and result in more
earnings volatility and generally lower earnings due to the expensing of deal
costs and restructuring costs of acquired companies. This standard was applied
to business combinations disclosed in Note 4 that were completed after
2008. Also, since we have significant acquired deferred tax assets
for which full valuation allowances were recorded at the acquisition date, the
standard could significantly effect the results of operations if changes in the
valuation allowances occur subsequent to adoption. As of September 27,
2009, such deferred tax valuation allowances amounted to
$4.6 million.
In
February 2009, the FASB issued an accounting standard codified within ASC
805, “Business Combinations” which amends the provisions related to the initial
recognition and measurement, subsequent measurement, and disclosure of assets
and liabilities arising from contingencies in a business combination. The
standard applies to all assets acquired and liabilities assumed in a business
combination that arise from contingencies that would be within the scope of ASC
450, “Contingencies”, if not acquired or assumed in a business combination,
except for assets or liabilities arising from contingencies that are subject to
specific guidance in ASC 805. The standard applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. The
adoption of the standard effective December 29, 2008 did not have an impact
on our financial position and results of operations.
In
December 2007, the FASB issued an accounting standard codified within ASC
810, “Consolidation”. The standard establishes accounting and
reporting standards for ownership interests in subsidiaries held by parties
other than the parent, the amount of consolidated net income attributable to the
parent and to the noncontrolling interest, changes in a parent’s ownership
interest, and the valuation of retained noncontrolling equity investments when a
subsidiary is deconsolidated. Noncontrolling interest (minority
interest) is required to be recognized as equity in the consolidated financial
statements and separate from the parent’s equity. The standard also establishes
disclosure requirements that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling owners. The
effective date of the standard is for fiscal years beginning after
December 15, 2008. We adopted the standard on December 29, 2008. As of
September 27, 2009, our noncontrolling interest totaled $0.7 million,
which is included in the stockholders’ equity section of our Consolidated
Balance Sheets. The Company has incorporated presentation and disclosure
requirements in our consolidated financial statements for the first nine months
of 2009.
In March
2008, the FASB issued an accounting standard related to disclosures about
derivative instruments and hedging activities, codified within ASC 815,
“Derivatives and Hedging”. Provisions of this standard change the
disclosure requirements for derivative instruments and hedging activities
including enhanced disclosures about (a) how and why derivative instruments
are used, (b) how derivative instruments and related hedged items are
accounted for under ASC 815 and its related interpretations, and (c) how
derivative instruments and related hedged items affect our financial position,
financial performance, and cash flows. This statement was effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008. We adopted the standard on December 29, 2008. See
Note 10 for our enhanced disclosures required under this standard.
In
April 2008, the FASB issued an accounting standard codified within ASC 350,
“Intangibles - Goodwill and Other” which amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset Under this standard,
entities estimating the useful life of a recognized intangible asset must
consider their historical experience in renewing or extending similar
arrangements or, in the absence of historical experience, must consider
assumptions that market participants would use about renewal or
extension. The intent of the standard is to improve the consistency
between the useful life of a recognized intangible asset and the period of
expected cash flows used to measure the fair value of the asset. Adoption of the
standard was effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal
years. We adopted the standard on December 29, 2008. We do not expect the
standard to have a material impact on our accounting for future acquisitions of
intangible assets.
In
June 2008, the FASB issued an accounting standard codified within ASC 260,
“Earnings Per Share” which provides that unvested share-based payment awards
that contain nonforfeitable rights to dividends or dividend equivalents (whether
paid or unpaid) are participating securities and shall be included in the
computation of earnings per share pursuant to the two-class method. The standard
is effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Upon
adoption, an entity is required to retrospectively adjust its earnings per share
data (including any amounts related to interim periods, summaries of earnings
and selected financial data) to conform to the standard’s provisions. We adopted
this pronouncement effective December 29, 2008 and the adoption did not
have an impact on our calculation of earnings per share.
In
November 2008, the FASB issued an accounting standard codified within ASC
350, “Intangibles - Goodwill and Other” that applies to defensive assets which
are acquired intangible assets which the acquirer does not intend to actively
use, but intends to hold to prevent its competitors from obtaining access to the
asset. The standard clarifies that defensive intangible assets are separately
identifiable and should be accounted for as a separate unit of accounting in
accordance with guidance provided within ASC 805, “Business Combinations” and
ASC 820, “Fair Value Measurements and Disclosures”. The standard is
effective for intangible assets acquired in fiscal years beginning on or after
December 15, 2008 and will be applied by us to intangible assets acquired
on or after December 29, 2008.
In
December 2008, the FASB issued an accounting standard codified within ASC
810, “Consolidation” and ASC 860, “Transfers and Servicing”. The standard was
effective for the first reporting period ending after December 15, 2008 and
requires additional disclosures concerning transfers of financial assets and an
enterprise’s involvement with variable interest entities (VIE) and qualifying
special purpose entities under certain conditions. Upon adoption in our interim
consolidated financial statements for the quarter ending March 29, 2009,
there were no required disclosures.
In
April 2009, the FASB issued an accounting standard codified within ASC 825,
“Financial Instruments” (ASC 825-10-65) that requires disclosures about the fair
value of financial instruments that are not reflected in the consolidated
balance sheets at fair value whenever summarized financial information for
interim reporting periods is presented. Entities are required to disclose the
methods and significant assumptions used to estimate the fair value of financial
instruments and describe changes in methods and significant assumptions, if any,
during the period. The standard is effective for interim reporting periods
ending after June 15, 2009 and was adopted by the Company in the second
quarter of 2009. See Note 10 for our disclosures required under the
standard.
In
April 2009, the FASB issued an accounting standard codified within ASC 820,
“Fair Value Measurements and Disclosures,” which provides guidance on
determining fair value when there is no active market or where the price inputs
being used represent distressed sales. The standard reaffirms the
objective of fair value measurement, which is to reflect how much an asset would
be sold for in an orderly transaction. It also reaffirms the need to use
judgment to determine if a formerly active market has become inactive, as well
as to determine fair values when markets have become inactive. The standard is
effective for interim and annual periods ending after June 15, 2009 and was
adopted by the Company in the second quarter of 2009. The adoption of this
accounting pronouncement did not have a material impact on our consolidated
results of operations and financial condition.
In
May 2009, the FASB issued an accounting standard codified within ASC 855,
“Subsequent Events,” which sets forth general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. It
requires the disclosure of the date through which an entity has evaluated
subsequent events and the basis for that date, that is, whether that date
represents the date the financial statements were issued or were available to be
issued. The standard is effective for interim or annual periods
ending after June 15, 2009 and was adopted by the Company in the second quarter
of 2009. The adoption of this standard did not have a material impact
on our consolidated results of operations and financial
condition. See Note 1, “Basis of Accounting” for the required
disclosures.
In August
2009, the FASB issued ASU No. 2009-04, “Accounting for Redeemable Equity
Instruments.” The ASU represents an update to ASC 480-10-S99
“Distinguishing Liabilities from Equity.” This update provides
guidance on what type of instruments should be classified as temporary versus
permanent equity, as well as guidance with respect to
measurement. The adoption of the ASU did not have a material impact
on our consolidated results of operations and financial condition.
New
Accounting Pronouncements and Other Standards
In
December 2008, the FASB issued an accounting standard codified within ASC
715, “Compensation – Retirement Benefits” that requires enhanced disclosures
about the plan assets of a Company’s defined benefit pension and other
postretirement plans. The enhanced disclosures are intended to provide users of
financial statements with a greater understanding of: (1) how investment
allocation decisions are made, including the factors that are pertinent to an
understanding of investment policies and strategies; (2) the major
categories of plan assets; (3) the inputs and valuation techniques used to
measure the fair value of plan assets; (4) the effect of fair value
measurements using significant unobservable inputs (Level 3) on changes in plan
assets for the period; and (5) significant concentrations of risk within
plan assets. The disclosures under this standard are effective for us for the
fiscal year ending December 27, 2009. We are currently
evaluating the requirements of these additional disclosures.
In June
2009, the FASB issued FAS 166, “Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities,” which has yet to be
codified in the ASC. Once codified, the standard would amend ASC 860
“Transfers and Servicing” by: eliminating the concept of a qualifying
special-purpose entity (QSPE); clarifying and amending the derecognition
criteria for a transfer to be accounted for as a sale; amending and clarifying
the unit of account eligible for sale accounting; and requiring that a
transferor initially measure at fair value and recognize all assets obtained
(for example beneficial interests) and liabilities incurred as a result of a
transfer of an entire financial asset or group of financial assets accounted for
as a sale. Additionally, on and after the effective date, existing QSPEs (as
defined under previous accounting standards) must be evaluated for consolidation
by reporting entities in accordance with the applicable consolidation guidance.
The standard requires enhanced disclosures about, among other things, a
transferor’s continuing involvement with transfers of financial assets accounted
for as sales, the risks inherent in the transferred financial assets that have
been retained, and the nature and financial effect of restrictions on the
transferor’s assets that continue to be reported in the statement of financial
position. The standard will be effective as of the beginning of
interim and annual reporting periods that begin after November 15, 2009,
which for us would be December 28, 2009, the first day of our 2010 fiscal
year. We are currently evaluating the impact of this standard on our
consolidated results of operations and financial condition.
In
June 2009, the FASB issued FAS 167 “Amendments to FASB Interpretation
No. 46(R),” which has yet to be codified within the ASC. Once
codified, the standard would amend ASC 810, “Consolidation” to address the
elimination of the concept of a qualifying special purpose
entity. The standard also replaces the quantitative-based risks and
rewards calculation for determining which enterprise has a controlling financial
interest in a variable interest entity with an approach focused on identifying
which enterprise has the power to direct the activities of a variable interest
entity and the obligation to absorb losses of the entity or the right to receive
benefits from the entity. This standard also requires continuous reassessments
of whether an enterprise is the primary beneficiary of a VIE whereas previous
accounting guidance required reconsideration of whether an enterprise was the
primary beneficiary of a VIE only when specific events had
occurred. The standard provides more timely and useful information
about an enterprise’s involvement with a variable interest entity
and will be effective as of the beginning of interim and annual
reporting periods that begin after November 15, 2009, which for us would be
December 28, 2009, the first day of our 2010 fiscal year. We are
currently evaluating the impact of this standard on our consolidated results of
operations and financial condition.
In August
2009, the FASB issued ASU No. 2009-05, “Fair Value Measurements and
Disclosures – Measuring Liabilities at Fair Value.”. The ASU provides additional
guidance for the fair value measurement of liabilities under ASC 820 “Fair Value
Measurements and Disclosures”. The ASU provides clarification that in
circumstances in which a quoted price in an active market for the identical
liability is not available, a reporting entity is required to measure fair value
using certain techniques. The ASU also clarifies that when estimating the fair
value of a liability, a reporting entity is not required to include a separate
input or adjustment to other inputs relating to the existence of a restriction
that prevents the transfer of a liability. It also clarifies that both a quoted
price in an active market for the identical liability at the measurement date
and the quoted price for the identical liability when traded as an asset in an
active market when no adjustments to the quoted price of the asset are required
are Level 1 fair value measurements. The ASU is effective for the
first interim reporting period beginning after its issuance, which for us would
be the fourth fiscal quarter of 2009. The adoption of the ASU is not
expected to have a material impact on our consolidated results of operations and
financial condition.
In
October 2009, the FASB issued ASU 2009-13, “Multiple-Deliverable Revenue
Arrangements, (amendments to ASC Topic 605, Revenue Recognition)” (ASU 2009-13)
and ASU 2009-14, “Certain Arrangements That Include Software Elements,
(amendments to ASC Topic 985, Software)” (ASU 2009-14). ASU 2009-13
requires entities to allocate revenue in an arrangement using estimated selling
prices of the delivered goods and services based on a selling price hierarchy.
The amendments eliminate the residual method of revenue allocation and require
revenue to be allocated using the relative selling price method. ASU
2009-14 removes tangible products from the scope of software revenue guidance
and provides guidance on determining whether software deliverables in an
arrangement that includes a tangible product are covered by the scope of the
software revenue guidance. ASU 2009-13 and ASU 2009-14 should be applied on
a prospective basis for revenue arrangements entered into or materially modified
in fiscal years beginning on or after June 15, 2010, with early adoption
permitted. We are currently evaluating the impact of the adoption of these ASUs
on the Company’s consolidated results of operations or financial
condition.
Note 2. STOCK-BASED
COMPENSATION
Stock-based
compensation cost recognized in operating results (included in selling, general,
and administrative expenses) for the three and nine months ended September 27,
2009 was $1.9 million and $5.3 million ($1.3 million and $3.7 million, net of
tax), respectively. For the three and nine months ended September 28, 2008, the
total compensation expense was $2.0 million and $5.9 million ($1.5 million and
$4.1 million, net of tax), respectively. The associated actual tax benefit
realized for the tax deduction from option exercises of share-based payment
units and awards released equaled $0.4 million and $3.0 million for the nine
months ended September 27, 2009 and September 28, 2008,
respectively.
Stock
Options
Option
activity under the principal option plans as of September 27, 2009 and changes
during the nine months ended September 27, 2009 were as follows:
|
|
Number
of
Shares
|
Weighted-
Average
Exercise
Price
|
Weighted-
Average
Remaining
Contractual
Term
(in
years)
|
Aggregate
Intrinsic
Value
(in
thousands)
|
|
|
|
|
|
|
|
Outstanding
at December 28, 2008
|
2,880,326
|
$
18.85
|
6.42
|
$ 25
|
|
Granted
|
238,102
|
8.52
|
|
|
|
Exercised
|
(3,495)
|
11.04
|
|
|
|
Forfeited
or expired
|
(77,697)
|
17.45
|
|
|
|
|
|
|
|
|
|
Outstanding
at September 27, 2009
|
3,037,236
|
$
18.09
|
5.92
|
$
5,150
|
|
|
|
|
|
|
|
Vested
and expected to vest at September 27, 2009
|
2,859,054
|
$
18.10
|
5.75
|
$
4,694
|
|
|
|
|
|
|
|
Exercisable
at September 27, 2009
|
1,985,018
|
$
17.41
|
4.55
|
$
3,213
|
The
aggregate intrinsic value in the table above represents the total pre-tax
intrinsic value (the difference between the Company’s closing stock price on the
last trading day of the third quarter of fiscal 2009 and the exercise price,
multiplied by the number of in-the-money options) that would have been received
by the option holders had all option holders exercised their options on
September 27, 2009. This amount changes based on the fair market value of the
Company’s stock. Total intrinsic value of options exercised for the nine months
ended September 27, 2009 and September 28, 2008 was $19 thousand and
$8.2 million, respectively.
As of
September 27, 2009, $3.5 million of total unrecognized compensation cost related
to stock options is expected to be recognized over a weighted-average period of
1.8 years.
The fair
value of share-based payment units was estimated using the Black-Scholes option
pricing model. The table below presents the weighted-average expected life in
years. The expected life computation is based on historical exercise patterns
and post-vesting termination behavior. Volatility is determined using changes in
historical stock prices. The interest rate for periods within the expected life
of the award is based on the U.S. Treasury yield curve in effect at the time of
grant.
The
following assumptions and weighted-average fair values were as
follows:
|
Nine
months ended
|
September
27,
2009
|
|
September
28,
2008
|
|
|
|
|
|
|
|
|
Weighted-average
fair value of grants
|
$ 3.41
|
|
$ 8.73
|
|
|
Valuation
assumptions:
|
|
|
|
|
|
Expected
dividend yield
|
0.00
|
%
|
0.00
|
%
|
|
Expected
volatility
|
44.53
|
%
|
38.27
|
%
|
|
Expected
life (in years)
|
4.85
|
|
4.89
|
|
|
Risk-free
interest rate
|
1.658
|
%
|
2.483
|
%
|
Restricted
Stock Units
Nonvested
service based restricted stock units as of September 27, 2009 and changes during
the nine months ended September 27, 2009 were as follows:
|
|
Number
of
Shares
|
Weighted-
Average
Vest
Date
(in
years)
|
Weighted-
Average
Grant
Date
Fair
Value
|
|
|
|
|
|
|
Nonvested
at December 28, 2008
|
552,985
|
1.34
|
$
36.45
|
|
Granted
|
204,863
|
|
$
10.29
|
|
Vested
|
(116,153)
|
|
$
11.39
|
|
Forfeited
|
(11,642)
|
|
$
23.29
|
|
|
|
|
|
|
Nonvested
at September 27, 2009
|
630,053
|
1.28
|
$
37.87
|
|
|
|
|
|
|
Vested
and expected to vest at September 27, 2009
|
537,536
|
1.22
|
|
|
|
|
|
|
|
Vested
at September 27, 2009
|
52,520
|
—
|
|
The total
fair value of restricted stock awards vested during the first nine months of
2009 was $1.3 million as compared to $1.9 million in the first nine months of
2008. As of September 27, 2009, there was $3.5 million unrecognized stock-based
compensation expense related to nonvested restricted stock units. That cost is
expected to be recognized over a weighted-average period of 1.8
years.
Note 3.
INVENTORIES
Inventories
consist of the following:
(amounts in
thousands)
|
|
September
27,
2009
|
December
28,
2008
|
|
Raw
materials
|
$
18,192
|
$ 16,287
|
|
Work-in-process
|
5,410
|
6,100
|
|
Finished
goods
|
74,081
|
79,735
|
|
|
|
|
|
Total
|
$
97,683
|
$
102,122
|
Note 4. GOODWILL AND OTHER INTANGIBLE
ASSETS
We had
intangible assets with a net book value of $107.0 million and $113.8 million as
of September 27, 2009 and December 28, 2008, respectively.
The
following table reflects the components of intangible assets as of September 27,
2009 and December 28, 2008:
(dollar amounts
in thousands)
|
|
|
September
27, 2009
|
|
December
28, 2008
|
|
|
Amortizable
Life
(years)
|
Gross
Amount
|
Gross
Accumulated
Amortization
|
|
Gross
Amount
|
Gross
Accumulated
Amortization
|
|
Finite-lived
intangible assets:
|
|
|
|
|
|
|
|
Customer
lists
|
20
|
$ 82,762
|
$
36,694
|
|
$ 81,037
|
$
31,184
|
|
Trade
name
|
30
|
31,883
|
17,294
|
|
30,610
|
16,107
|
|
Patents,
license agreements
|
5
to 14
|
63,937
|
44,445
|
|
60,986
|
40,277
|
|
Other
|
3
to 6
|
9,802
|
5,129
|
|
9,700
|
3,140
|
|
Total
amortized finite-lived intangible assets
|
|
188,384
|
103,562
|
|
182,333
|
90,708
|
|
|
|
|
|
|
|
|
|
Indefinite-lived
intangible assets:
|
|
|
|
|
|
|
|
Trade
name
|
|
22,160
|
—
|
|
22,130
|
—
|
|
|
|
|
|
|
|
|
|
Total
identifiable intangible assets
|
5
to 14
|
$
210,544
|
$
103,562
|
|
$
204,463
|
$
90,708
|
Amortization
expense for the three and nine months ended September 27, 2009 was $3.1 million
and $9.3 million, respectively. Amortization expense for the three and nine
months ended September 28, 2008 was $3.3 million and $9.4 million,
respectively.
Estimated
amortization expense for each of the five succeeding years is anticipated to
be:
(amounts in
thousands)
|
2009
|
$
12,309
|
|
2010
|
$
11,783
|
|
2011
|
$
10,377
|
|
2012
|
$ 9,589
|
|
2013
|
$ 8,451
|
The
changes in the carrying amount of goodwill are as follows:
(amounts
in thousands)
|
|
Shrink
Management
Solutions
|
Apparel
Labeling
Solutions
|
Retail
Merchandising
Solutions
|
Total
|
|
Balance
as of December 30, 2007
|
$ 191,575
|
$ 4,683
|
$ 78,343
|
$ 274,601
|
|
Acquired
during the year
|
24,130
|
—
|
—
|
24,130
|
|
Purchase
accounting adjustment
|
9,300
|
(174)
|
—
|
9,126
|
|
Impairment
losses
|
(48,219)
|
(3,550)
|
(7,813)
|
(59,582)
|
|
Translation
adjustments
|
(7,293)
|
(959)
|
(4,491)
|
(12,743)
|
|
Balance
as of December 28, 2008
|
169,493
|
—
|
66,039
|
235,532
|
|
Acquired
during the year
|
—
|
7,437
|
—
|
7,437
|
|
Purchase
accounting adjustment
|
(114)
|
—
|
—
|
(114)
|
|
Translation
adjustments
|
3,840
|
6
|
3,156
|
7,002
|
|
Balance
as of September 27, 2009
|
$ 173,219
|
$ 7,443
|
$ 69,195
|
$ 249,857
|
The
following table reflects the components of goodwill as of September 27, 2009 and
December 28, 2008:
(dollar amounts
in thousands)
|
|
September
27, 2009
|
|
December
28, 2008
|
|
|
Gross
Amount
|
Accumulated
Impairment
Losses
|
|
Gross
Amount
|
Accumulated
Impairment
Losses
|
|
Shrink
Management Solutions
|
$
231,158
|
$ 57,939
|
|
$ 225,509
|
$
56,016
|
|
Apparel
Labeling Solutions
|
27,312
|
19,869
|
|
19,387
|
19,387
|
|
Retail
Merchandising Solutions
|
142,005
|
72,810
|
|
135,973
|
69,934
|
|
|
|
|
|
|
|
|
Total
goodwill
|
$
400,475
|
$
150,618
|
|
$
380,869
|
$
145,337
|
In July
2009, the Company entered into an agreement to purchase the business of
Brilliant, a China-based manufacturer of woven and printed labels, and settled
the acquisition on August 14, 2009 for approximately $38.3 million,
including cash acquired of $0.6 million and the assumption of debt of $19.6
million. The transaction was paid in cash and the purchase price
includes the acquisition of 100% of Brilliant’s voting equity
interests. Acquisition costs incurred in connection with the
transaction are recognized within selling, general and administrative expenses
in the consolidated statement of operations and approximate $0.7 million and
$0.4 million for the year ended December 28, 2008 and the nine months ended
September 27, 2009, respectively.
The
financial statements reflect the preliminary allocations of the Brilliant
purchase price based on estimated fair values at the date of acquisition. This
allocation has resulted in acquired goodwill of $7.4 million, which is not
tax deductible. The allocation of the purchase price is expected to be completed
during fiscal year 2009. The results from the acquisition date through
September 27, 2009 are included in the Apparel Labeling Solutions segment
and were not material to the consolidated financial statements (revenues of $4.1
million and net loss of $0.2 million). Goodwill resulting from the
acquisition is also included in the Apparel Labeling Solutions
segment.
During
the first quarter of 2009, we changed our reportable segments to conform to our
new management structure (refer to Note 13, “Business Segments” for additional
information). Our fiscal 2008 goodwill disclosure has been changed to conform to
these new segments. As a result of this change, $48.2 million of our 2008
Apparel Labeling Solutions impairment has been reclassified under our Shrink
Management Solutions segment.
For the
year ended December 28, 2008, the Company completed step one of its fiscal
2008 annual analysis and test for impairment of goodwill and it was determined
that certain goodwill related to the Apparel Labeling Solutions and Retail
Merchandising Solutions segments was impaired. The second step of the goodwill
impairment test was not completed prior to the issuance of the fiscal 2008
financial statements. Therefore, the Company recognized a charge of
$59.6 million as a reasonable estimate of the impairment loss in its fiscal
2008 financial statements. The impairment charge was recorded in goodwill
impairment on the consolidated statement of operations. The impairment charge
was attributed to a combination of a decline in our market capitalization of the
Company and a decline in the estimated forecasted discounted cash flows expected
by the Company.
During
the first quarter of fiscal 2009, the Company completed the second step of its
fiscal 2008 annual analysis and test for impairment of goodwill and it was
determined that no further adjustment to the estimated impairment recorded at
December 28, 2008 was needed.
We
perform an assessment of goodwill by comparing each individual reporting unit’s
carrying amount of net assets, including goodwill, to their fair value at least
annually during the fourth quarter of each fiscal year and whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. Future annual assessments could result in impairment charges, which
would be accounted for as an operating expense.
Note 5. DEBT
In
connection with the acquisition of Brilliant, the Company assumed debt of $19.6
million. As of September 27, 2009, $10.6 million of this amount
remained outstanding. The debt assumed includes capital leases,
accounts receivable factoring arrangements, a banking facility, term loans and
an overdraft facility.
Capital Leases –
The capital
leases totaled $4.3 million (HKD 33.6 million) on September 27, 2009, with a
weighted average interest rate of 4.10% as of September 27, 2009. The
capital leases mature at various dates through July of 2014. As of September 27,
2009, $2.7 million (HKD 20.6 million) is included in current portion of
long-term debt and $1.6 million (HKD 13.0 million) is included in long-term
borrowings in the accompanying consolidated balance sheets.
Factoring Arrangement -
The
variable interest rate full-recourse factoring arrangement of accounts
receivable has a maximum limit of $3.2 million (HKD 25.0 million) and totaled
$2.9 million (HKD 22.1 million) as of September 27, 2009. The
arrangement is secured by trade receivables. The arrangement bears interest
of HKD Prime Rate + 1.00%. On September 27, 2009, the interest rate
is 6.00%. The factoring arrangement is included in short-term
borrowings in the accompanying consolidated balance sheets.
Banking Facility -
The
banking facility includes trade finance facilities, an overdraft facility, and a
short term money market loan. The aggregate amount outstanding under
the banking facility totaled $1.6 million (HKD 12.6 million) as of September 27,
2009. The banking facility is secured by a fixed cash deposit of $0.5
million (HKD 4.0 million). Interest rates on these arrangements range
from HKD Prime Rate + 0.75% to HKD Prime Rate + 1.75%. The weighted
average interest rate on these arrangements at September 27, 2009 is
6.41%. The banking facility is included in short-term borrowings and
the secured cash deposit is recorded within restricted cash in the accompanying
consolidated balance sheets.
Term Loans –
The term loans
totaled $1.1 million (RMB 7.6 million) on September 27, 2009. The
interest rates range from 5.84% to 6.00%. The term loans mature in
May 2012 and are included in long-term borrowings in the accompanying
consolidated balance sheets.
Overdraft Facilities -
The
overdraft facilities have a maximum borrowing limit of $0.8 million (HKD 6.2
million) and totaled $0.7 million (HKD 5.1 million) at September 27,
2009. The facilities are secured by a fixed cash deposit of $0.6
million (HKD 5.0 million). The interest rates on these arrangements range from
HKD Prime Rate + 1.75% to HKD Prime Rate + 2.25%. On September 27,
2009, the weighted average interest rate on the overdraft facilities is
6.86%. The overdraft facilities are included in short-term borrowings
and the secured cash deposit is recorded within restricted cash in the
accompanying consolidated balance sheets.
During
the second quarter of 2009, our outstanding Asialco loans were paid down and a
loan for $3.7 million (RMB25 million) was renewed in April 2009 for a
12 month period. As of September 27, 2009, our outstanding Asialco loan
balance is $3.7 million (RMB25 million) and has a maturity date of
April 2010. The loan is included in short-term borrowings in the accompanying
consolidated balance sheets. The loan is collateralized by land and buildings
with an aggregate carrying value of $5.7 million as of September 27,
2009.
In August
2009, $8.5 million (¥800 million) was paid in order to extinguish our existing
Japanese local line of credit. The line of credit was included in short-term
borrowings in the accompanying consolidated balance sheets.
In
September 2009, we entered into a new Japanese local line of credit for $6.5
million (¥600 million). The line of credit matures in September 2010,
and is included in short-term borrowings in the accompanying consolidated
balance sheets.
Long-term
debt as of September 27, 2009 and December 28, 2008 consisted of the
following:
(amounts in
thousands)
|
|
September
27,
2009
|
December
28,
2008
|
|
Secured
credit facility:
|
|
|
|
$125 million
variable interest rate revolving credit facility maturing in
2012
|
$
104,154
|
$ —
|
|
Senior
unsecured credit facility:
|
|
|
|
$150 million
variable interest rate revolving credit facility maturing in
2010
|
—
|
133,596
|
|
Term
Loans
|
1,118
|
—
|
|
Other
capital leases with maturities through 2014
|
7,043
|
338
|
|
|
|
|
|
Total
|
112,315
|
133,934
|
|
Less
current portion
|
3,603
|
230
|
|
|
|
|
|
Total
long-term portion
|
$
108,712
|
$
133,704
|
On
April 30, 2009, we entered into a new $125.0 million three-year senior
secured multi-currency revolving credit agreement (“Secured Credit Facility”)
with a syndicate of lenders. The Secured Credit Facility replaces the
$150.0 million senior unsecured multi-currency credit facility (“Senior
Unsecured Credit Facility”) arranged in December 2005. Prior to entering
into the Secured Credit Facility, $23.0 million of the Senior Unsecured Credit
Facility was paid down during the second quarter of 2009.
The
Secured Credit Facility also includes an expansion option that gives us the
right to increase the aggregate revolving commitment by an amount up to
$50 million, for a potential total commitment of $175 million. The
expansion option allows the additional $50 million in increments of $25 million
based upon consolidated earnings before interest, taxes, and depreciation and
amortization (EBITDA) on June 28, 2009 and December 27, 2009, respectively.
Based on our consolidated EBITDA at June 28, 2009, we qualified to request the
initial $25 million expansion option for a total potential commitment of $150
million.
The
Secured Credit Facility contains a $25.0 million sublimit for the issuance
of letters of credit, of which $1.4 million are outstanding as of
September 27, 2009. The Secured Credit Facility also contains a
$15.0 million sublimit for swingline loans. Borrowings under the Secured
Credit Facility bear interest at rates of LIBOR plus an applicable margin
ranging from 2.50% to 3.75% and/or prime plus 1.50% to 2.75%. The interest rate
matrix is based on our leverage ratio of consolidated funded debt to EBITDA, as
defined by the Secured Credit Facility Agreement (“Facility Agreement”). Under
the Facility Agreement, we pay an unused line fee ranging from 0.30% to 0.75%
per annum on the unused portion of the commitment.
All
obligations of domestic borrowers under the Secured Credit Facility are
irrevocably and unconditionally guaranteed on a joint and several basis by our
domestic subsidiaries. Foreign borrowers under the Secured Credit Facility are
irrevocably and unconditionally guaranteed on a joint and several basis by
certain of our foreign subsidiaries as well as the domestic guarantors.
Collateral under the Secured Credit Facility includes a 100% stock pledge of
domestic subsidiaries, stock powers of first-tier foreign subsidiaries, a
blanket lien on all U.S. assets excluding real estate, a guarantee of foreign
obligations and a 65% stock pledge of material foreign subsidiaries, a lien on
certain assets of our German and Hong Kong subsidiaries, and assignment of
certain bank deposit accounts. The approximate net book value of the collateral
as of September 27, 2009 is
$260
million.
The
Secured Credit Facility contains covenants that include requirements for a
maximum debt to EBITDA ratio of 2.75, a minimum fixed charge coverage ratio of
1.25 as well as other affirmative and negative covenants. As of
September 27, 2009, we were in compliance with all covenants.
As of September 27, 2009, the
Company incurred $3.9 million in fees and expenses in connection with the
Secured Credit Facility, which are amortized over the term of the Secured Credit
Facility to interest expense on the consolidated statement of operations. An
immaterial amount of remaining unamortized debt issuance costs recognized in
connection with the Senior Unsecured Credit Facility was recognized in other
gain (loss) on the consolidated statement of operations in the second quarter of
fiscal 2009.
During
the second quarter of 2009, we recorded a $2.6 million capital lease related to
the purchase of software.
Note 6. PER SHARE
DATA
The
following data shows the amounts used in computing earnings per share and the
effect on net earnings from continuing operations and the weighted-average
number of shares of dilutive potential common stock:
(amounts in
thousands, except per share data)
|
|
Quarter
(13
weeks) Ended
|
|
Nine
Months
(39
weeks) Ended
|
|
|
September
27,
2009
|
September
28,
2008
|
|
September
27,
2009
|
September
28,
2008
|
|
|
|
|
|
|
|
|
Basic
earnings attributable to Checkpoint Systems, Inc. available to common
stockholders
|
$ 2,639
|
$ 12,776
|
|
$ 7,563
|
$ 31,930
|
|
|
|
|
|
|
|
|
Diluted
earnings attributable to Checkpoint Systems, Inc. available to common
stockholders
|
2,639
|
12,776
|
|
7,563
|
31,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares:
|
|
|
|
|
|
|
Weighted-average
number of common shares outstanding
|
38,956
|
38,617
|
|
38,876
|
39,193
|
|
Shares
issuable under deferred compensation agreements
|
414
|
316
|
|
393
|
343
|
|
|
|
|
|
|
|
|
Basic
weighted-average number of common shares outstanding
|
39,370
|
38,933
|
|
39,269
|
39,536
|
|
Common
shares assumed upon exercise of stock options and awards
|
368
|
439
|
|
201
|
656
|
|
Shares
issuable under deferred compensation arrangements
|
15
|
11
|
|
19
|
12
|
|
|
|
|
|
|
|
|
Dilutive
weighted-average number of common shares outstanding
|
39,753
|
39,383
|
|
39,489
|
40,204
|
|
|
|
|
|
|
|
|
Basic
earnings attributable to Checkpoint Systems, Inc. per
share
|
$ .07
|
$ .33
|
|
$ .19
|
$ .81
|
|
|
|
|
|
|
|
|
Diluted
earnings attributable to Checkpoint Systems, Inc. per
share
|
$ .07
|
$ .32
|
|
$ .19
|
$ .79
|
Anti-dilutive
potential common shares are not included in our earnings per share calculation.
The Long-term Incentive Plan restricted stock units were excluded from our
calculation due to the performance of vesting criteria not being
met.
The
number of anti-dilutive common share equivalents for the three and nine month
periods ended September 27, 2009 and September 28, 2008 were as
follows:
(share amounts in
thousands)
|
|
Quarter
(13
weeks) Ended
|
|
Nine
Months
(39
weeks) Ended
|
|
|
September
27,
2009
|
September
28,
2008
|
|
September
27,
2009
|
September
28,
2008
|
|
Weighted-average
common share equivalents associated with anti-dilutive stock options and
restricted stock units excluded from the computation of diluted
EPS
|
2,021
|
1,359
|
|
2,613
|
1,253
|
Note 7. SUPPLEMENTAL CASH FLOW
INFORMATION
Cash
payments for interest and income taxes for the thirty-nine week periods ended
September 27, 2009 and September 28, 2008 were as follows:
(amounts in
thousands)
|
|
Nine
Months
(39
weeks) Ended
|
|
|
September
27,
2009
|
September
28,
2008
|
|
Interest
|
$
4,439
|
$
3,736
|
|
Income
tax payments
|
$
7,852
|
$
10,799
|
|
|
|
|
During
the first quarter of 2009, a contingent payment of $6.8 million was made related
to the Alpha acquisition since revenues for the S3 business exceeded the minimum
contingency payment thresholds established in the Alpha asset purchase
agreement. The payment is reflected in the acquisition of businesses line within
investing activities on the Consolidated Statement of Cash Flows.
In July
2009, the Company entered into an agreement to purchase the business of
Brilliant, a China-based manufacturer of woven and printed labels, and settled
the acquisition on August 14, 2009 for approximately $38.3 million,
including cash acquired of $0.6 million and the assumption of debt of $19.6
million. The transaction was paid in cash and the purchase price
includes the acquisition of 100% of Brilliant’s voting equity
interests. The payment to acquire Brilliant, net of cash acquired, is
reflected in the acquisition of businesses line within investing activities on
the Consolidated Statement of Cash Flows.
During
the third quarter of 2009 we transferred $5.6 million (HKD 43.0 million) of
acquired Brilliant properties and relieved the associated liability to the
former Brilliant owner. This transaction was a non-cash transaction
and is excluded from our Consolidated Statement of Cash Flows as of September
27, 2009.
Excluded
from the Consolidated Statement of Cash Flows for the nine months ended
September 27, 2009 is a $2.6 million capital lease liability and the related
capitalized asset.
Note
8. PROVISION FOR RESTRUCTURING
Restructuring
expense for the three and nine month periods ended September 27, 2009 and
September 28, 2008 was as follows:
(amounts in
thousands)
|
|
Quarter
(13
weeks) Ended
|
|
Nine
Months
(39
weeks) Ended
|
|
|
September
27,
2009
|
September
28,
2008
|
|
September
27,
2009
|
September
28,
2008
|
|
|
|
|
|
|
|
|
Manufacturing
Restructuring Plan
|
|
|
|
|
|
|
Severance
and other employee-related charges
|
$ 1
|
$ 162
|
|
$ 24
|
$ 741
|
|
2005
Restructuring Plan
|
|
|
|
|
|
|
Severance
and other employee-related charges
|
152
|
409
|
|
1,188
|
3,357
|
|
Lease
termination costs
|
—
|
(1)
|
|
—
|
71
|
|
Asset
impairment
|
—
|
(3)
|
|
—
|
398
|
|
Acquisition
restructuring costs
|
—
|
281
|
|
—
|
281
|
|
Total
|
$
153
|
$ 848
|
|
$ 1,212
|
$
4,848
|
Restructuring
accrual activity for the nine months ended September 27, 2009 was as
follows:
(amounts in
thousands)
|
|
Accrual
at
Beginning
of
Year
|
Charged
to
Earnings
|
Charge
Reversed
to
Earnings
|
Cash
Payments
|
Other
|
Exchange
Rate
Changes
|
Accrual
at
9/27/2009
|
|
Manufacturing
Restructuring Plan
|
|
|
|
|
|
|
|
|
Severance
and other employee-related charges
|
$ 652
|
$ 157
|
$
(133)
|
$
(670)
|
$ —
|
$
(6)
|
$ —
|
|
2005
Restructuring Plan
|
|
|
|
|
|
|
|
|
Severance
and other employee-related charges
|
3,302
|
1,439
|
(251)
|
(3,845)
|
—
|
(31)
|
614
|
|
Acquisition
restructuring costs
(1)
|
568
|
—
|
—
|
(150)
|
(322)
|
(7)
|
89
|
|
Total
|
$
4,522
|
$
1,596
|
$
(384)
|
$
(4,665)
|
$
(322)
|
$
(44)
|
$
703
|
(
1) During 2007, restructuring
costs of $1.2 million included as a cost of the SIDEP acquisition
($1.1 million related to employee severance and $0.1 million related
to the cost to abandon facilities) were accounted for under Emerging Issues Task
Force Issue No. 95-3 “Recognition of Liabilities in Connection with
Purchase Business Combinations.” These costs were recognized as an assumed
liability in the acquisition and were included in the purchase price allocation
at November 9, 2007. During the first nine months of 2009, $0.3 million of
the acquisition restructuring liability was reversed related to the SIDEP
acquisition.
Manufacturing
Restructuring Plan
In
August 2008, we announced a manufacturing and supply chain restructuring
program designed to accelerate profitable growth in our Apparel Labeling
Solutions (ALS), formerly Check-Net®, business and to support
incremental improvements in our EAS systems and labels businesses.
For the
nine months ended September 27, 2009, there was a net charge to earnings of $24
thousand recorded in connection with the Manufacturing Restructuring
Plan.
As of
September 27, 2009, the total number of employees affected by the Manufacturing
Restructuring Plan were 76, of which all have been terminated. The remaining
anticipated costs are expected to be incurred through the end of 2010 and are
expected to approximate $3.0 million to $4.0 million, of which
$1.6 million has been incurred and paid. Termination benefits are planned
to be paid one month to 24 months after termination.
2005
Restructuring Plan
In the
second quarter of 2005, we initiated actions focused on reducing our overall
operating expenses. This plan included the implementation of a cost reduction
plan designed to consolidate certain administrative functions in Europe and a
commitment to a plan to restructure a portion of our supply chain manufacturing
to lower cost areas. During the fourth quarter of 2006, we continued to review
the results of the overall initiatives and added an additional reduction focused
on the reorganization of senior management to focus on key markets and
customers. This additional restructuring reduced our management by
25%.
For the
nine months ended September 27, 2009, a net charge of $1.2 million was
recorded in connection with the 2005 Restructuring Plan. The charge was composed
of severance accruals and related costs.
The total
number of employees affected by the 2005 Restructuring Plan were 897, of which
all have been terminated. The anticipated total cost is expected to approximate
$32 million, of which $32 million has been incurred and $31 million
paid. Termination benefits are planned to be paid one month to 24 months
after termination.
Note 9. PENSION
BENEFITS
The
components of net periodic benefit cost for the three and nine month periods
ended September 27, 2009 and September 28, 2008 were as follows:
(amounts
in thousands)
|
|
Quarter
(13
weeks) Ended
|
|
Nine
Months
(39
weeks) Ended
|
|
|
September
27,
2009
|
September
28,
2008
|
|
September
27,
2009
|
September
28,
2008
|
|
Service
cost
|
$ 251
|
$ 277
|
|
$ 750
|
$ 844
|
|
Interest
cost
|
1,189
|
1,183
|
|
3,413
|
3,587
|
|
Expected
return on plan assets
|
(17)
|
(18)
|
|
(49)
|
(56)
|
|
Amortization
of actuarial (gain) loss
|
(3)
|
(12)
|
|
(7)
|
(34)
|
|
Amortization
of transition obligation
|
33
|
34
|
|
95
|
107
|
|
Amortization
of prior service costs
|
1
|
1
|
|
2
|
2
|
|
|
|
|
|
|
|
|
Net
periodic pension cost
|
$
1,454
|
$
1,465
|
|
$
4,204
|
$
4,450
|
We expect
the cash requirements for funding the pension benefits to be approximately $5.1
million during fiscal 2009, including $3.8 million which was funded during the
nine months ended September 27, 2009.
Note
10. FAIR VALUE MEASUREMENT, FINANCIAL INSTRUMENTS AND RISK
MANAGEMENT
Fair
Value Measurement
We
utilize the market approach to measure fair value for our financial assets and
liabilities. The market approach uses prices and other relevant information
generated by market transactions involving identical or comparable assets or
liabilities.
The fair
value hierarchy is intended to increase consistency and comparability in fair
value measurements and related disclosures. The fair value hierarchy is based on
inputs to valuation techniques that are used to measure fair value that are
either observable or unobservable. Observable inputs reflect assumptions market
participants would use in pricing an asset or liability based on market data
obtained from independent sources while unobservable inputs reflect a reporting
entity’s pricing based upon their own market assumptions.
The fair
value hierarchy consists of the following three levels:
|
|
|
|
|
|
Level
1
|
Inputs
are quoted prices in active markets for identical assets or
liabilities.
|
|
|
|
|
|
|
Level
2
|
Inputs
are quoted prices for similar assets or liabilities in an active market,
quoted prices for identical or similar assets or liabilities in markets
that are not active, inputs other than quoted prices that are observable
and market-corroborated inputs which are derived principally from or
corroborated by observable market data.
|
|
|
|
|
|
|
Level
3
|
Inputs
are derived from valuation techniques in which one or more significant
inputs or value drivers are
unobservable.
|
Because
the Company’s derivatives are not listed on an exchange, the Company values
these instruments using a valuation model with pricing inputs that are
observable in the market or that can be derived principally from or corroborated
by observable market data. The Company’s methodology also incorporates the
impact of both the Company’s and the counterparty’s credit
standing.
The
following table represents our liabilities measured at fair value on a recurring
basis as of September 27, 2009 and December 28, 2008 and the basis for that
measurement:
(amounts
in thousands)
|
|
Total
Fair
Value
Measurement
September
27,
2009
|
Quoted
Prices
In
Active
Markets
for
Identical
Assets
(Level
1)
|
Significant
Other
Observable
Inputs
(Level
2)
|
Significant
Unobservable
Inputs
(Level
3)
|
|
Foreign
currency forward exchange contracts
|
$
136
|
$
—
|
$
136
|
$
—
|
|
Total
assets
|
$
136
|
$
—
|
$
136
|
$
—
|
|
|
|
|
|
|
|
Foreign
currency revenue forecast contracts
|
$640
|
$
—
|
$
640
|
$
—
|
|
Interest
rate swap
|
441
|
—
|
441
|
—
|
|
Total
liabilities
|
$
1,081
|
$
—
|
$
1,081
|
$
—
|
|
|
Total
Fair
Value
Measurement
December
28,
2008
|
Quoted
Prices
In
Active
Markets
for
Identical
Assets
(Level
1)
|
Significant
Other
Observable
Inputs
(Level
2)
|
Significant
Unobservable
Inputs
(Level
3)
|
|
Foreign
currency forward exchange contracts
|
$ 901
|
$
—
|
$ 901
|
$
—
|
|
Foreign
currency revenue forecast contracts
|
48
|
—
|
48
|
—
|
|
Interest
rate swap
|
916
|
—
|
916
|
—
|
|
Total
liabilities
|
$
1,865
|
$
—
|
$
1,865
|
$
—
|
The
following table provides a summary of the activity associated with all of our
designated cash flow hedges (interest rate and foreign currency) reflected in
accumulated other comprehensive income for the nine months ended September 27,
2009:
(amounts
in thousands)
|
|
September
27,
2009
|
|
Beginning
balance, net of tax
|
$
880
|
|
Changes
in fair value gain, net of tax
|
(161)
|
|
Reclassification
to earnings, net of tax
|
(2,104)
|
|
Ending
balance, net of tax
|
$
(1,385)
|
We
believe that the fair values of our current assets and current liabilities
(cash, restricted cash, accounts receivable, accounts payable, and other current
liabilities) approximate their reported carrying amounts. The carrying values
and the estimated fair values of non-current financial assets and liabilities
that qualify as financial instruments and are not measured at fair value on a
recurring basis at September 27, 2009 and December 28, 2008 are
summarized in the following table:
|
|
September
27, 2009
|
|
December
28, 2008
|
|
|
Carrying
Amount
|
Estimated
Fair
Value
|
|
Carrying
Amount
|
Estimated
Fair
Value
|
|
Long-term
debt (including current maturities and excluding capital leases)
(1)
|
$
105,272
|
$
105,272
|
|
$
133,596
|
$
133,596
|
|
(1)
The carrying amounts are reported on the balance sheet under the indicated
captions.
|
Long-term
debt is carried at the original offering price, less any payments of principal.
Rates currently available to us for long-term borrowings with similar terms and
remaining maturities are used to estimate the fair value of existing borrowings
as the present value of expected cash flows. The Secured Credit Facility’s
maturity date is in the year 2012.
Financial
Instruments and Risk Management
We
manufacture products in the USA, the Caribbean, Europe, the U.K., and the Asia
Pacific region for both the local marketplace, and for export to our foreign
subsidiaries. The subsidiaries, in turn, sell these products to customers in
their respective geographic areas of operation, generally in local currencies.
This method of sale and resale gives rise to the risk of gains or losses as a
result of currency exchange rate fluctuations on inter-company receivables and
payables. Additionally, the sourcing of product in one currency and the sales of
product in a different currency can cause gross margin fluctuations due to
changes in currency exchange rates.
Our major
market risk exposures are movements in foreign currency and interest rates. We
have historically not used financial instruments to minimize our exposure to
currency fluctuations on our net investments in and cash flows derived from our
foreign subsidiaries. We have used third-party borrowings in foreign currencies
to hedge a portion of our net investments in and cash flows derived from our
foreign subsidiaries. We enter into forward exchange contracts to reduce the
risks of currency fluctuations on short-term inter-company receivables and
payables. These contracts are entered into with major financial institutions,
thereby minimizing the risk of credit loss. Our policy is to manage interest
rates through the use of interest rate caps or swaps. We do not hold or issue
derivative financial instruments for speculative or trading purposes. We are
subject to other foreign exchange market risk exposure resulting from
anticipated non-financial instrument foreign currency cash flows which are
difficult to reasonably predict, and have therefore not been included in the
table of fair values. All listed items described are non-trading.
We have
used third party borrowings in foreign currencies to hedge a portion of our net
investments in and cash flows derived from our foreign subsidiaries. As we
reduce our third party foreign currency borrowings, the effect of foreign
currency fluctuations on our net investments in and cash flows derived from our
foreign subsidiaries increases.
The
following table presents the fair values of derivative instruments included
within the consolidated balance sheets as of September 27, 2009 and December 28,
2008:
(amounts
in thousands)
|
|
September
27, 2009
|
|
December
28, 2008
|
|
|
Asset
Derivatives
|
Liability
Derivatives
|
|
Asset
Derivatives
|
Liability
Derivatives
|
|
|
Balance
Sheet
Location
|
Fair
Value
|
Balance
Sheet
Location
|
Fair
Value
|
|
Balance
Sheet
Location
|
Fair
Value
|
Balance
Sheet
Location
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency revenue forecast contracts
|
Other
current assets
|
$
—
|
Other
current liabilities
|
$
640
|
|
Other
current assets
|
$
263
|
Other
current liabilities
|
$ 311
|
|
Interest
rate swap contracts
|
Other
current assets
|
—
|
Other
current liabilities
|
441
|
|
Other
current assets
|
—
|
Other
long-term liabilities
|
916
|
|
Total
derivatives designated as hedging instruments
|
|
—
|
|
1,081
|
|
|
263
|
|
1,227
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency forward exchange contracts
|
Other
current assets
|
136
|
Other
current liabilities
|
—
|
|
Other
current assets
|
10
|
Other
current liabilities
|
911
|
|
Total
derivatives not designated as hedging instruments
|
|
136
|
|
—
|
|
|
10
|
|
911
|
|
Total
derivatives
|
|
$
136
|
|
$
1,081
|
|
|
$
273
|
|
$
2,138
|
The
following tables present the amounts affecting the consolidated statement of
operations for the three month periods ended September 27, 2009 and September
28, 2008:
(amounts
in thousands)
|
|
September
27, 2009
|
|
September
28, 2008
|
|
|
Amount of
Gain
(Loss)
Recognized
in
Other
Comprehensive
Income
on
Derivatives
|
Location
of
Gain
(Loss)
Reclassified
From
Accumulated
Other
Comprehensive
Income
into
Income
|
Amount of
Gain
(Loss)
Reclassified
From
Accumulated
Other
Comprehensive
Income into
Income
|
Amount
of
Forward
Points
Recognized
in
Other
Gain
(Loss),
net
|
|
Amount of
Gain
(Loss)
Recognized
in
Other
Comprehensive
Income
on
Derivatives
|
Location
of
Gain
(Loss)
Reclassified
From
Accumulated
Other
Comprehensive
Income
into
Income
|
Amount of
Gain
(Loss)
Reclassified
From
Accumulated
Other
Comprehensive
Income into
Income
|
Amount
of
Forward
Points
Recognized
in
Other
Gain
(Loss),
net
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency revenue forecast contracts
|
$
(603)
|
Cost
of sales
|
$
86
|
$
(8)
|
|
$
490
|
Cost
of sales
|
$ —
|
$ (137)
|
|
Interest
rate swap contracts
|
211
|
Interest
expense
|
(274)
|
—
|
|
(51)
|
Interest
expense
|
(50)
|
—
|
|
Total
designated cash flow hedges
|
$
(392)
|
|
$
( 188)
|
$
(8)
|
|
$
439
|
|
$
(50)
|
$
(137)
|
The
following tables present the amounts affecting the consolidated statement of
operations for the nine month periods ended September 27, 2009 and September 28,
2008:
(amounts
in thousands)
|
|
September
27, 2009
|
|
September
28, 2008
|
|
|
Amount of
Gain
(Loss)
Recognized
in
Other
Comprehensive
Income
on
Derivatives
|
Location
of
Gain
(Loss)
Reclassified
From
Accumulated
Other
Comprehensive
Income
into
Income
|
Amount of
Gain
(Loss)
Reclassified
From
Accumulated
Other
Comprehensive
Income into
Income
|
Amount
of
Forward
Points
Recognized
in
Other
Gain
(Loss),
net
|
|
Amount of
Gain
(Loss)
Recognized
in
Other
Comprehensive
Income
on
Derivatives
|
Location
of
Gain
(Loss)
Reclassified
From
Accumulated
Other
Comprehensive
Income
into
Income
|
Amount of
Gain
(Loss)
Reclassified
From
Accumulated
Other
Comprehensive
Income into
Income
|
Amount
of
Forward
Points
Recognized
in
Other
Gain
(Loss),
net
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency revenue forecast contracts
|
$
(462)
|
Cost
of sales
|
$
2,147
|
$
(63)
|
|
$
590
|
Cost
of sales
|
$
—
|
$
(203)
|
|
Interest
rate swap contracts
|
474
|
Interest
expense
|
(794)
|
—
|
|
88
|
Interest
expense
|
(88)
|
—
|
|
Total
designated cash flow hedges
|
$
12
|
|
$
1,353
|
$
(63)
|
|
$
678
|
|
$
(88)
|
$
(203)
|
(amounts
in thousands)
|
|
Quarter
(13
weeks) Ended
|
|
Nine
Months
(39
weeks) Ended
|
|
|
September
27, 2009
|
|
September
28, 2008
|
|
September
27, 2009
|
|
September
28, 2008
|
|
|
Amount
of
Gain
(Loss)
Recognized
in
Income
on
Derivatives
|
Location
of Gain (Loss)
Recognized
in Income
on
Derivatives
|
|
Amount
of
Gain
(Loss)
Recognized
in
Income
on
Derivatives
|
Location
of Gain (Loss)
Recognized
in Income
on
Derivatives
|
|
Amount
of
Gain
(Loss)
Recognized
in
Income
on
Derivatives
|
Location
of Gain (Loss)
Recognized
in Income
on
Derivatives
|
|
Amount
of
Gain
(Loss)
Recognized
in
Income
on
Derivatives
|
Location
of Gain (Loss)
Recognized
in Income
on
Derivatives
|
|
Derivatives
not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange forwards and options
|
$
(91)
|
Other
gain
(loss),
net
|
|
$
1,099
|
Other
gain
(loss),
net
|
|
$
(33)
|
Other
gain
(loss),
net
|
|
$
97
|
Other
gain
(loss),
net
|
We
selectively purchase currency forward exchange contracts to reduce the risks of
currency fluctuations on short-term inter-company receivables and payables.
These contracts guarantee a predetermined exchange rate at the time the contract
is purchased. This allows us to shift the effect of positive or negative
currency fluctuations to a third party. Transaction gains or losses
resulting from these contracts are recognized at the end of each reporting
period. We use the fair value method of accounting, recording realized and
unrealized gains and losses on these contracts. These gains and losses are
included in other gain (loss), net on our consolidated statements of
operations. As of September 27, 2009, we had currency forward
exchange contracts with notional amounts totaling approximately
$12.6 million. The fair value of the forward exchange contracts was
reflected as a $136 thousand asset and is included in other current assets in
the accompanying balance sheets. The contracts are in the various local
currencies covering primarily our North American, Western European, Canadian,
and Australian operations. Historically, we have not purchased currency forward
exchange contracts where it is not economically efficient, specifically for our
operations in South America and Asia.
Beginning
in the second quarter of 2008, we entered into various foreign currency
contracts to reduce our exposure to forecasted Euro-denominated inter-company
revenues. These contracts were designated as cash flow hedges. The foreign
currency contracts mature at various dates from October 2009 to June 2010. The
purpose of these cash flow hedges is to eliminate the currency risk associated
with Euro-denominated forecasted revenues due to changes in exchange rates.
These cash flow hedging instruments are marked to market and the changes are
recorded in other comprehensive income. Amounts recorded in other
comprehensive income are recognized in cost of goods sold as the inventory is
sold to external parties. Any hedge ineffectiveness is charged to other gain
(loss), net on our consolidated statements of operations. As of
September 27, 2009, the fair value of these cash flow hedges were reflected as a
$0.6 million liability and are included in other current liabilities in the
accompanying consolidated balance sheets. The total notional amount of these
hedges is $15.1 million (€10.8 million) and the unrealized loss
recorded in other comprehensive income was $1.1 million (net of taxes of
$23 thousand), of which the full amount is expected to be reclassified to
earnings over the next twelve months. During the three and nine month periods
ended September 27, 2009, a $0.1 million and $2.1 million benefit related
to these foreign currency hedges was recorded to cost of goods sold as the
inventory was sold to external parties, respectively. The Company recognized a
zero and $8 thousand loss during the three and nine months ended September 27,
2009 for hedge ineffectiveness, respectively.
During
the first quarter of 2008, we entered into an interest rate swap agreement with
a notional amount of $40 million and a maturity date of February 18,
2010. The purpose of this interest rate swap agreement is to hedge potential
changes to our cash flows due to the variable interest nature of our senior
unsecured credit facility. The interest rate swap was designated as a cash flow
hedge. This cash flow hedging instrument is marked to market and the changes are
recorded in other comprehensive income. Any hedge ineffectiveness is charged to
interest expense. As of September 27, 2009, the fair value of
the interest rate swap agreement was reflected as a $0.4 million liability
and is included in other current liabilities in the accompanying consolidated
balance sheets and the unrealized loss recorded in other comprehensive income
was $0.3 million (net of taxes of $0.1 million). We estimate that the full
amount of the loss in accumulated other comprehensive income will be
reclassified to earnings over the next twelve months. The Company
recognized no hedge ineffectiveness during the three and nine months ended
September 27, 2009.
Note
11. INCOME TAXES
The
effective tax rate for the thirty-nine weeks ended September 27, 2009 was
60.7% as compared to 5.3% for the thirty-nine weeks ended September 28,
2008. Absent restructuring expense and the impact of valuation allowances, the
effective tax rate for the thirty-nine weeks ended September 27, 2009 was 41.3%
compared to 21.5% for the thirty-nine weeks ended September 28, 2008. The
primary change in the 2009 effective tax rate when compared to prior quarters is
the change in management’s expectation regarding the future realization of
deferred tax assets in Japan and Italy, resulting in discrete tax charges of
$2.5 million and $1.1 million, respectively. During the first nine months of
2008, we recorded a $7.4 million benefit relating to discrete
events. Significant items included in the $7.4 million were a
$4.8 million benefit relating to the release of a valuation allowance as a
result of strategic decisions related to foreign operations, a $1.1 million
release of unrecognized tax benefits due to a favorable conclusion of an
Australian tax audit, and a $1.7 million tax benefit related to
restructuring and deferred compensation expenses.
We file
income tax returns in the U.S. and in various states, local and foreign
jurisdictions. We are routinely examined by tax authorities in these
jurisdictions. It is possible that these examinations may be resolved within
twelve months. Due to the potential for resolution of federal, state and foreign
examinations, and the expiration of various statutes of limitation, it is
reasonably possible that the gross unrecognized tax benefits balance may change
within the next twelve months by a range of $2.0 million to $7.5
million.
Note 12. CONTINGENT LIABILITIES AND
SETTLEMENTS
We are
involved in certain legal actions, all of which have arisen in the ordinary
course of business. Management believes that the ultimate resolution of such
matters is unlikely to have a material adverse effect on our consolidated
results of operations and/or financial condition, except as described
below:
Matter
related to All-Tag Security S.A., et al
We
originally filed suit on May 1, 2001, alleging that the disposable,
deactivatable radio frequency security tag manufactured by All-Tag Security S.A.
and All-Tag Security Americas, Inc.’s (jointly “All-Tag”) and sold by
Sensormatic Electronics Corporation (Sensormatic) infringed on a U.S. Patent
No. 4,876,555 (Patent) owned by us. On April 22, 2004, the United
States District Court for the Eastern District of Pennsylvania granted summary
judgment to defendants All-Tag and Sensormatic on the ground that our Patent was
invalid for incorrect inventorship. We appealed this decision. On June 20,
2005, we won an appeal when the Federal Circuit reversed the grant of summary
judgment and remanded the case to the District Court for further proceedings. On
January 29, 2007 the case went to trial. On February 13, 2007, a jury
found in favor of the defendants on infringement, the validity of the Patent and
the enforceability of the Patent. On June 20, 2008, the Court entered
judgment in favor of defendants based on the jury’s infringement and
enforceability findings. On February 10, 2009, the Court granted
defendants’ motions for attorneys’ fees under Section 285 of the Patent
Statute. The district court will have to quantify the amount of attorneys’ fees
to be awarded, but it is expected that defendants will request approximately
$5.7 million plus interest. We recognized this amount during the fourth
fiscal quarter ended December 28, 2008 in litigation settlements on the
consolidated statement of operations. We intend to appeal any award of legal
fees.
Other
Settlements
During
the second quarter of 2009, we recorded $1.3 million of litigation expense
related to the settlement of a dispute with a consultant for $0.9 million and
the acquisition of a patent related to our Alpha business for $0.4 million. We
purchased the patent for $1.7 million related to our Alpha business. A portion
of this purchase price was attributable to use prior to the date of acquisition
and as a result we recorded $0.4 million in litigation expense and $1.3 million
in intangibles.
Note 13. BUSINESS
SEGMENTS
Historically,
we have reported our results of operations into three segments: Shrink
Management Solutions, Intelligent Labels, and Retail Merchandising. During the
first quarter of 2009, resulting from a change in our management structure, we
began reporting our segments into three new segments: Shrink Management
Solutions, Apparel Labeling Solutions, and Retail Merchandising Solutions. The
third quarter of 2008 has been conformed to reflect the segment change. Shrink
Management Solutions now includes results of our EAS labels and library
business. Apparel Labeling Solutions, formerly referred to as Check-Net®,
includes tag and label solutions sold to apparel manufacturers and retailers,
which leverage our graphic and design expertise, strategically located service
bureaus, and our Check-Net® e-commerce capabilities. Our apparel labeling
services coupled with our EAS and RFID capabilities provide a combination of
apparel branding and identification with loss prevention and supply chain
visibility. There were no changes to the Retail Merchandising
Segment.
(amounts in
thousands)
|
|
Quarter
(13
weeks) Ended
|
|
Nine
Months
(39
weeks) Ended
|
|
|
September
27,
2009
|
September
28,
2008
|
|
September
27,
2009
|
September
28,
2008
|
|
Business
segment net revenue:
|
|
|
|
|
|
|
Shrink
Management Solutions
|
$
141,020
|
$
179,388
|
|
$
383,307
|
$
505,279
|
|
Apparel
Labeling Solutions
|
35,192
|
31,698
|
|
98,095
|
102,237
|
|
Retail
Merchandising Solutions
|
17,866
|
22,909
|
|
53,539
|
72,299
|
|
|
|
|
|
|
|
|
Total
revenues
|
$
194,078
|
$
233,995
|
|
$
534,941
|
$
679,815
|
|
|
|
|
|
|
|
|
Business
segment gross profit:
|
|
|
|
|
|
|
Shrink
Management Solutions
|
$ 63,027
|
$ 74,668
|
|
$
166,241
|
$
209,155
|
|
Apparel
Labeling Solutions
|
13,161
|
11,386
|
|
37,175
|
36,762
|
|
Retail
Merchandising Solutions
|
8,486
|
11,577
|
|
25,479
|
36,134
|
|
|
|
|
|
|
|
|
Total
gross profit
|
84,674
|
97,631
|
|
228,895
|
282,051
|
|
|
|
|
|
|
|
|
Operating
expenses
|
71,237
|
79,509
|
|
207,047
|
244,309
|
|
Interest
income (expense), net
|
(1,459)
|
(845)
|
|
(3,723)
|
(2,033)
|
|
Other
gain (loss), net
|
(523)
|
(1,512)
|
|
296
|
(2,118)
|
|
|
|
|
|
|
|
|
Earnings
before income taxes
|
$ 11,455
|
$ 15,765
|
|
$ 18,421
|
$ 33,591
|
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS
Information
Relating to Forward-Looking Statements
This
report includes forward-looking statements made pursuant to the safe harbor
provision of the Private Securities Litigation Reform Act of 1995. Except for
historical matters, the matters discussed are forward-looking statements, within
the meaning of Section 27A of the Securities Act of 1933, as amended, that
reflect our current views with respect to future events and financial
performance. These forward-looking statements are subject to certain risks and
uncertainties which could cause actual results to differ materially from
historical results or those anticipated. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of their
dates. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. Information about potential factors that could affect our
business and financial results is included in our Annual Report on Form 10-K for
the year ended December 28, 2008, and our other Securities and Exchange
Commission filings.
Overview
We are a
multinational manufacturer and marketer of identification, tracking, security
and merchandising solutions primarily for the retail industry. We provide
technology-driven integrated supply chain solutions to brand, track, and secure
goods for retailers and consumer product manufacturers worldwide. We are a
leading provider of, and earn revenues primarily from the sale of, electronic
article surveillance (EAS), store monitoring solutions (CheckView™), custom tags
and labels (Apparel Labeling Solutions), hand-held labeling systems (HLS),
retail merchandising systems (RMS), and radio frequency identification
(RFID) systems and software. Applications of these products include
primarily retail security, asset and merchandise visibility, automatic
identification, and pricing and promotional labels and signage. Operating
directly in 30 countries, we have a global network of subsidiaries and
distributors and provide customer service and technical support around the
world.
Our
results are heavily dependent upon sales to the retail market. Our customers are
dependent upon retail sales, which are susceptible to economic cycles and
seasonal fluctuations. Furthermore, as approximately two-thirds of our revenues
and operations are located outside the U.S., fluctuations in foreign currency
exchange rates have a significant impact on reported results.
Historically,
we have reported our results of operations into three segments: Shrink
Management Solutions, Intelligent Labels, and Retail Merchandising. During the
first quarter of 2009, resulting from a change in our management structure, we
began reporting our segments into three new segments: Shrink Management
Solutions, Apparel Labeling Solutions, and Retail Merchandising Solutions.
Fiscal year 2008 has been conformed to reflect the segment change. The margins
for each of the segments and the identifiable assets attributable to each
reporting segment are set forth in Note 13 “Business Segments” to the
consolidated financial statements. Shrink Management Solutions now includes
results of our EAS labels and library businesses. Apparel Labeling Solutions,
formerly referred to as Check-Net®, includes tag and label solutions sold to
apparel manufacturers and retailers, which leverage our graphic and design
expertise, strategically located service bureaus, and our Check-Net
®
e-commerce capabilities. Our apparel labeling services, coupled with our EAS and
RFID capabilities, provide a combination of apparel branding and identification
with loss prevention and supply chain visibility. There were no changes to the
Retail Merchandising Solutions segment.
Our
business has been impacted by the unprecedented credit crisis and on-going
softening of the global economic environment. In response to these market
conditions, we continue to focus on providing customers with innovative products
that will be valuable in addressing shrink, which is particularly important
during a difficult economic environment. We have also implemented initiatives to
reduce costs and improve working capital to mitigate the effects of the economy
on our business. We believe that the strength of our core business and our
ability to generate positive cash flow will sustain us through this challenging
period.
In July
2009, the Company entered into an agreement to purchase the business of
Brilliant, a China-based manufacturer of woven and printed labels, and settled
the acquisition in August 2009. The financial statements reflect the
preliminary allocations of the Brilliant purchase price based on estimated fair
values at the date of acquisition. The results from the acquisition
and related goodwill are included in the Apparel Labeling Solutions
segment. This acquisition will allow us to strengthen and expand our
core apparel labeling offering and provides us with additional capacity in a key
geographical location.
Brilliant’s woven and
printed label manufacturing capabilities will establish us as a full range
global supplier for the apparel labeling solutions business.
In
August 2008, we announced a manufacturing and supply chain restructuring
program designed to accelerate profitable growth in our ALS business and to
support incremental improvements in our EAS systems and labels businesses. We
anticipate this program to result in total restructuring charges of
approximately $3 million to $4 million, or $0.06 to $0.08 per diluted
share. We continue to expect implementation of this program to be complete in
2010 and to result in annualized cost savings of approximately
$6 million.
Future
financial results will be dependent upon our ability to expand the functionality
of our existing product lines, develop or acquire new products for sale through
our global distribution channels, convert new large chain retailers to RF-EAS,
and reduce the cost of our products and infrastructure to respond to competitive
pricing pressures.
Our base
of recurring revenue (revenues from the sale of consumables into the installed
base of security systems and hand-held labeling tools and services from
monitoring and maintenance), repeat customer business, and our borrowing
capacity should provide us with adequate cash flow and liquidity to execute our
business plan.
Critical
Accounting Policies and Estimates
There has
been no change to our critical accounting policies and estimates, contained in
Item 7 “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” of our Annual Report on Form 10-K filed for the year ended
December 28, 2008.
Results
of Operations
All
comparisons are with the prior year period, unless otherwise
stated.
Net
Revenues
Our unit
volume is driven by product offerings, number of direct sales personnel,
recurring sales and, to some extent, pricing. Our base of installed systems
provides a source of recurring revenues from the sale of disposable tags,
labels, and service revenues.
Our
customers are substantially dependent on retail sales, which are seasonal,
subject to significant fluctuations, and difficult to predict. Such seasonality
and fluctuations impact our sales. Historically, we have experienced lower sales
in the first half of each year.
Analysis
of Statement of Operations
Thirteen
Weeks Ended September 27, 2009 Compared to Thirteen Weeks Ended September 28,
2008
The
following table presents for the periods indicated certain items in the
consolidated statement of operations as a percentage of total revenues and the
percentage change in dollar amounts of such items compared to the indicated
prior period:
|
|
|
|
|
|
|
|
|
|
Percentage
of Total Revenue
|
|
Percentage
Change
In
Dollar
Amount
|
|
|
Quarter
ended
|
September
27,
2009
(Fiscal
2009)
|
|
September
28,
2008
(Fiscal
2008)
|
|
Fiscal
2009
vs.
Fiscal
2008
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
|
|
|
|
|
|
Shrink
Management Solutions
|
72.7
|
%
|
76.7
|
%
|
(21.4)
|
%%
|
|
Apparel
Labeling Solutions
|
18.1
|
|
13.5
|
|
11.0
|
|
|
Retail
Merchandising Solutions
|
9.2
|
|
9.8
|
|
(22.0)
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
100.0
|
|
100.0
|
|
(17.1)
|
|
|
Cost
of revenues
|
56.4
|
|
58.3
|
|
(19.8)
|
|
|
|
|
|
|
|
|
|
|
Total
gross profit
|
43.6
|
|
41.7
|
|
(13.3)
|
|
|
Selling,
general, and administrative expenses
|
34.1
|
|
31.6
|
|
(10.4)
|
|
|
Research
and development
|
2.5
|
|
2.3
|
|
(8.0)
|
|
|
Restructuring
expense
|
0.1
|
|
0.4
|
|
(82.0)
|
|
|
Litigation
settlement
|
—
|
|
0.2
|
|
N/A
|
|
|
Other
operating income
|
—
|
|
0.5
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
6.9
|
|
7.7
|
|
(25.9)
|
|
|
Interest
income
|
0.2
|
|
0.3
|
|
(38.1)
|
|
|
Interest
expense
|
1.0
|
|
0.7
|
|
23.4
|
|
|
Other
(loss) gain, net
|
(0.2)
|
|
(0.6)
|
|
(65.4)
|
|
|
|
|
|
|
|
|
|
|
Earnings
before income taxes
|
5.9
|
|
6.7
|
|
(27.3)
|
|
|
Income
taxes
|
4.5
|
|
1.2
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
1.4
|
|
5.5
|
|
(79.9)
|
|
|
Less:
(Loss) earnings attributable to noncontrolling interests
|
—
|
|
—
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Net
earnings attributable to Checkpoint Systems, Inc.
|
1.4
|
%
|
5.5
|
%
|
(79.3)
|
%%
|
N/A –
Comparative percentages are not meaningful.
Net
Revenues
Revenues
for the third quarter of 2009 compared to the third quarter of 2008 decreased by
$39.9 million, or 17.1%, from $234.0 million to $194.1 million. Foreign currency
translation had a negative impact on revenues of approximately $7.3 million, or
3.1%, in the third quarter of 2009 as compared to the third quarter of
2008.
(amounts in
millions)
|
Quarter
ended
|
September
27,
2009
(Fiscal
2009)
|
September
28,
2008
(Fiscal
2008)
|
|
Dollar
Amount
Change
Fiscal
2009
vs.
Fiscal
2008
|
|
Percentage
Change
Fiscal
2009
vs.
Fiscal
2008
|
|
|
Net
Revenues:
|
|
|
|
|
|
|
|
|
Shrink
Management Solutions
|
$
141.0
|
$
179.4
|
|
$
(38.4)
|
|
(21.4)
|
%
|
|
Apparel
Labeling Solutions
|
35.2
|
31.7
|
|
3.5
|
|
11.0
|
|
|
Retail
Merchandising Solutions
|
17.9
|
22.9
|
|
(5.0)
|
|
(22.0)
|
|
|
|
|
|
|
|
|
|
|
|
Net
Revenues
|
$
194.1
|
$
234.0
|
|
$
(39.9)
|
|
(17.1)
|
%
|
Shrink Management
Solutions
Shrink
Management Solutions revenues decreased by $38.4 million, or 21.4%, in the
third quarter of 2009 as compared to the third quarter of 2008. Foreign currency
translation had a negative impact of approximately $5.0 million. The
remaining revenue decrease was due primarily to declines in EAS systems,
CheckView™, Alpha, and our RFID business of $27.0 million,
$9.4 million, $2.5 million, and $2.3 million, respectively. These
declines were partially offset by an $8.3 million increase in our EAS
consumables business.
EAS
systems revenues decreased by $27.0 million in the third quarter of 2009 as
compared to the third quarter of 2008. The decrease was due primarily to
declines in revenues of $14.4 million in Europe, $8.3 million in the
U.S., and $3.6 million in Asia. The decline in Europe was due primarily to
2008 large chain-wide roll-outs in Spain, France, Belgium and Italy without
comparable roll-outs in 2009. The decline in the U.S. was due primarily to large
installations during the third quarter of 2008 without comparable roll-outs
during 2009. The decline in Asia was due primarily to weak economic conditions
in Japan coupled with large chain-wide installations in New Zealand and
Australia during 2008 without comparable roll-outs in 2009. Our EAS systems
business is dependent upon new store openings and the liquidity and financial
condition of our customers which has been impacted by current economic trends.
Our plan is to partially mitigate this issue by selling new solutions to
existing customers and increasing our market share through innovative products
such as Evolve™.
The
CheckView™ business declined by $9.4 million in 2009 primarily due to decreases
in the U.S., Asia and International Americas of $7.4 million, $1.6 million
and $0.4 million, respectively. The decline in our U.S. retail business was
due primarily to an overall decline in capital expenditures as a result of the
current weak economic conditions in the U.S. Our banking business declined
$2.2 million due primarily to decreased customer spending as a result of
the current economic condition in the financial services sector. We anticipate
our U.S. CheckView™ business will continue to experience difficulties this year
as constraints on capital spending by our customers and the slowing of new store
openings will likely continue as a result of the current economic conditions.
The decline in Asia was due primarily to large orders in Japan in 2008 without
comparable installations in 2009. The decline in International Americas was due
primarily to large orders in Canada in 2008 without comparable installations in
2009.
Our Alpha
business declined by $2.5 million in the third quarter of 2009 as compared
to the third quarter of 2008. The decrease was due primarily to declines in
revenues of $1.5 million in the U.S. and $1.3 million in Europe, which was
partially offset by a $0.5 million increase in Asia. The decrease in the U.S.
was primarily due to a decrease in volumes with several large customers due to
the current weak economic condition in the U.S. The decrease in Europe was
primarily due to a decrease in volumes due to the current weak economic
condition in Europe, which was partially offset by an increase in revenues in
the U.K. due to increased sales to a large customer. The increase in Asia was
primarily due to an increase in Australia due to sales to several new large
customers during the third quarter of 2009.
RFID
revenues decreased by $2.3 million during the third quarter of 2009 as compared
to the third quarter of 2008. The decrease was due primarily to declines in
revenues of $1.5 million in Europe and $0.7 million in the U.S. The decline
in Europe was due primarily to a large chain-wide roll-out in Germany in 2008
without a comparable roll-out in 2009. The decline in Germany was partially
offset by an increase in revenues related to the sale of detachers associated
with our hard tag at source program that are RFID enabled for future use. The
decline in the U.S. was due to a decrease in OATSystems Inc. revenues due to a
decrease in non-recurring licensing fees in 2009.
EAS
consumables revenue increased by $8.3 million in the third quarter of 2009 as
compared to the third quarter of 2008. The increase was due primarily to
increases in revenues of $5.6 million in Europe and $3.0 million in the
U.S., which were partially offset by a $0.4 million decrease in Asia. The
increases in Europe and the U.S. were due primarily to the implementation of our
new hard tag at source program. Our hard tag at source program growth is a
result of our efforts to provide our customers with new innovative solutions
that help retailers address shrink at lower costs. The growth in our hard tag at
source program was partially offset by a decrease in our EAS label business. Our
EAS label business decline was due to declines in Europe, International
Americas, North America, and Asia. The decline in Europe, International
Americas, and North America was due primarily to economic factors negatively
affecting retail sales and increased competition. The decline in Asia was due
primarily to the anticipated loss of customers associated with the acquisition
of SIDEP/Asialco.
Apparel Labeling
Solutions
Apparel
Labeling Solutions revenues increased by $3.5 million, or 11.0%, in the
third quarter of 2009 as compared to the third quarter of 2008. The increase was
partially offset by the negative impact of foreign currency translation of
approximately $1.0 million. The increase was primarily due to the Brilliant
acquisition, which increased revenues for the third quarter by $4.0 million. The
remaining increase during the third quarter of 2009 of $0.5 million was due to a
new customer in the U.S., which was partially offset by decreases in revenues
due to the general overall global decline resulting from current economic
conditions.
Retail Merchandising
Solutions
Retail
Merchandising Solutions revenues decreased by $5.0 million, or 22.0%, in
the third quarter of 2009 as compared to the third quarter of 2008. The negative
impact of foreign currency translation was approximately $1.2 million. The
remaining decrease in our RMS business was due to a decrease in our revenues
from retail display systems (RDS) of $3.1 million and a decrease in
revenues of HLS of $0.7 million. Our RDS decline is due to a general reduction
of store remodel work in Europe due to the current economic retail environment.
The decrease in HLS is due to increased competition and pricing pressures as
well as a general shift in market demand away from HLS products as retail
scanning technology continues to grow worldwide. We anticipate RDS and HLS to
continue to face difficult revenue trends in 2009 due to the impact of current
economic conditions on the RDS business and continued shifts in market demand
for HLS products.
Gross
Profit
During
the third quarter of 2009, gross profit decreased by $12.9 million, or
13.3%, from $97.6 million to $84.7 million. The negative impact of foreign
currency translation on gross profit was approximately $2.6 million. Gross
profit, as a percentage of net revenues, increased from 41.7% to
43.6%.
Shrink Management
Solutions
Shrink
Management Solutions gross profit as a percentage of Shrink Management Solutions
revenues increased to 44.7% in the third quarter of 2009, from 41.6% in the
third quarter of 2008. The increase in the gross profit percentage of Shrink
Management Solutions was due primarily to higher margins in our EAS consumables
business and Alpha business, partially offset by lower margins in our EAS
systems business. EAS consumables margins improved due primarily to lower
royalties due to the expiration of our EAS licensing obligation in
December 2008. EAS consumables also improved due to the favorable mix shift
associated with the decline in EAS labels revenue and an increase in hard tag at
source revenue. Alpha margins increased due to improved manufacturing variances
related to higher production volumes coupled with an improvement in warranty
costs. EAS systems margins decreased primarily due to a decline in volume,
coupled with pricing pressures.
Apparel Labeling
Solutions
Apparel
Labeling Solutions gross profit as a percentage of Apparel Labeling Solutions
revenues increased to 37.4% in the third quarter of 2009, from 35.9% in the
third quarter of 2008. Gross profit related to our newly acquired Brilliant
business was $0.9 million. The increase in Apparel Labeling Solutions margins
was due primarily to the better utilization of low-cost manufacturing
facilities, which resulted in improved product costs and reductions in
freight.
Retail Merchandising
Solutions
The
Retail Merchandising Solutions gross profit as a percentage of Retail
Merchandising Solutions revenues decreased to 47.5% in the third quarter of
2009, from 50.5% in the third quarter of 2008. The decrease in Retail
Merchandising Solutions gross profit percentage was due to a decline in margin
resulting from manufacturing variances related to a decline in volume, coupled
with pricing pressures.
Selling,
General, and Administrative Expenses
Selling,
general, and administrative expenses (SG&A) decreased $7.7 million, or
10.4%, over the third quarter of 2008. Foreign currency translation decreased
selling, general, and administrative expenses by approximately
$2.2 million. The remaining decrease was due primarily to lower bad debt
expense, lower sales and marketing expense, and lower general and administrative
expenses. The decrease in bad debt expense was attributable to an improved focus
on working capital during 2009. The decrease in sales and marketing expense
corresponds to the decrease in revenues over the prior year, coupled with an
increased effort by management to reduce costs. The decrease in general and
administrative expense is due to efforts to reduce costs. The cost reduction
efforts were due primarily to better control of discretionary spending and the
impact of our temporary global payroll reduction and furlough program. These
reductions were partially offset by an increase of expenses related to our
Brilliant acquisition during the third quarter of 2009.
Research
and Development Expenses
Research
and development (R&D) costs were $4.9 million, or 2.5% of revenues, in
the third quarter of 2009 and $5.3 million, or 2.3%, in the third quarter
2008. Foreign currency translation decreased R&D costs by approximately
$0.1 million. The remaining decrease was due to due to efforts to reduce
costs. The cost reduction efforts were due primarily to the impact of our
temporary global payroll reduction and furlough program.
Restructuring
Expenses
Restructuring
expenses were $0.2 million, or 0.1% of revenues, in the third quarter of 2009,
and $0.8 million, or 0.4% of revenues, in the third quarter of
2008.
Litigation
Settlement
Litigation
settlement expense was $0.5 million, or 0.2% of revenues, in the third
quarter of 2008 with no comparable charge in the third quarter of 2009. The
litigation settlement recorded in the third quarter of 2008 was due to a
contract settlement with a product manufacturer.
Other
Operating Income
Other
operating income was $1.0 million, or 0.5% of revenues, in the third
quarter of 2008 with no comparable charge in the third quarter of 2009. The 2008
income relates to the sale of our Czech Republic subsidiary, which is now
operating as a distributor of our products.
Interest
Income
Interest
income for the third quarter of 2009 decreased $0.3 million from the
comparable quarter in 2008 due to a decrease in cash on hand during the third
quarter of 2009.
Interest
Expense
Interest
expense for the third quarter of 2009 increased $0.4 million from the comparable
quarter in 2008 due to an increase in debt during the third quarter of
2009.
Other
Gain (Loss), net
Other
gain (loss), net increased by $1.0 million from the comparable quarter in
2008. The increase was due primarily to a foreign exchange loss of
$1.4 million in 2008 as compared to a foreign exchange loss of
$0.6 million in 2009.
Income
Taxes
Our
effective tax rate for the third quarter of 2009 was 77.6% as compared to 19.0%
for the third quarter of 2008. The current year was impacted due to the
recognition of valuation allowances on deferred tax assets in Japan and Italy,
resulting in discrete tax charges of $2.5 million and $1.1 million,
respectively. Excluding the impact of the valuation allowances, the effective
tax rate for the third quarter of 2009 was 46.2% compared to 19.7% for the third
quarter of 2008.
Net
Earnings Attributable to Checkpoint Systems, Inc.
Net
earnings attributable to Checkpoint Systems, Inc. were $2.6 million, or
$0.07 per diluted share, in the third quarter of 2009 compared to earnings of
$12.8 million, or $0.32 per diluted share, in the third quarter of 2008.
The weighted average number of shares used in the diluted earnings per share
computation were 39.8 million and 39.4 million for the third quarters
of 2009 and 2008, respectively.
Thirty-Nine
Weeks Ended September 27, 2009 Compared to Thirty-Nine Weeks Ended September 28,
2008
The
following table presents for the periods indicated certain items in the
consolidated statement of operations as a percentage of total revenues and the
percentage change in dollar amounts of such items compared to the indicated
prior period:
|
|
|
|
|
|
|
|
|
|
Percentage
of Total Revenue
|
|
Percentage
Change
In
Dollar
Amount
|
|
|
Thirty-nine
weeks ended
|
September
27,
2009
(Fiscal
2009)
|
|
September
28,
2008
(Fiscal
2008)
|
|
Fiscal
2009
vs.
Fiscal
2008
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
|
|
|
|
|
|
Shrink
Management Solutions
|
71.7
|
%
|
74.4
|
%
|
(24.1)
|
%%
|
|
Apparel
Labeling Solutions
|
18.3
|
|
15.0
|
|
(4.1)
|
|
|
Retail
Merchandising Solutions
|
10.0
|
|
10.6
|
|
(25.9)
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
100.0
|
|
100.0
|
|
(21.3)
|
|
|
Cost
of revenues
|
57.2
|
|
58.5
|
|
(23.1)
|
|
|
|
|
|
|
|
|
|
|
Total
gross profit
|
42.8
|
|
41.5
|
|
(18.8)
|
|
|
Selling,
general, and administrative expenses
|
35.5
|
|
32.9
|
|
(15.2)
|
|
|
Research
and development
|
2.8
|
|
2.4
|
|
(9.0)
|
|
|
Restructuring
expense
|
0.2
|
|
0.7
|
|
(75.0)
|
|
|
Litigation
settlement
|
0.2
|
|
0.1
|
|
N/A
|
|
|
Other
operating income
|
—
|
|
0.1
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
4.1
|
|
5.5
|
|
(42.1)
|
|
|
Interest
income
|
0.3
|
|
0.3
|
|
(32.2)
|
|
|
Interest
expense
|
0.9
|
|
0.6
|
|
26.3
|
|
|
Other
gain (loss), net
|
—
|
|
(0.3)
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Earnings
before income taxes
|
3.5
|
|
4.9
|
|
(45.2)
|
|
|
Income
taxes
|
2.1
|
|
0.2
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
1.4
|
|
4.7
|
|
(77.3)
|
|
|
Less:
(Loss) earnings attributable to noncontrolling interests
|
—
|
|
—
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Net
earnings attributable to Checkpoint Systems, Inc.
|
1.4
|
%
|
4.7
|
%
|
(76.3)
|
%%
|
N/A –
Comparative percentages are not meaningful.
Net
Revenues
Revenues
for the first nine months of 2009 compared to the same period in 2008 decreased
by $144.9 million, or 21.3%, from $679.8 million to $534.9 million. Foreign
currency translation had a negative impact on revenues of approximately $37.9
million, or 5.6%, in the first nine months of 2009 as compared to the first nine
months of 2008.
(amounts in
millions)
|
Thirty-nine
weeks ended
|
September
27,
2009
(Fiscal
2009)
|
September
28,
2008
(Fiscal
2008)
|
|
Dollar
Amount
Change
Fiscal
2009
vs.
Fiscal
2008
|
|
Percentage
Change
Fiscal
2009
vs.
Fiscal
2008
|
|
|
Net
Revenues:
|
|
|
|
|
|
|
|
|
Shrink
Management Solutions
|
$
383.3
|
$
505.3
|
|
$ (122.0)
|
|
(24.1)
|
%
|
|
Apparel
Labeling Solutions
|
98.1
|
102.2
|
|
(4.1)
|
|
(4.1)
|
|
|
Retail
Merchandising Solutions
|
53.5
|
72.3
|
|
(18.8)
|
|
(25.9)
|
|
|
|
|
|
|
|
|
|
|
|
Net
Revenues
|
$
534.9
|
$
679.8
|
|
$
(144.9)
|
|
(21.3)
|
%
|
Shrink Management
Solutions
Shrink
Management Solutions revenues decreased by $122.0 million, or 24.1%, in the
first nine months of 2009 as compared to the first nine months of 2008. Foreign
currency translation had a negative impact of approximately $23.9 million.
The remaining revenue decrease was due primarily to declines in EAS systems,
CheckView™, and Alpha business of $65.0 million, $32.6 million, and
$3.7 million, respectively. These declines were partially offset by a $1.6
million increase in our EAS consumables business and a $1.2 million increase in
our RFID business.
EAS
systems revenues decreased $65.0 million in the first nine months of 2009 as
compared to the first nine months of 2008. The decrease was due primarily to
declines in revenues of $36.4 million in Europe, $19.0 million in the
U.S., and $8.3 million in Asia. The decline in Europe was due primarily to
2008 large chain-wide roll-outs in Spain, France, Italy and Belgium without
comparable roll-outs in 2009. These declines were partially offset by a
chain-wide roll-out in Germany in 2009. The decline in the U.S. was due
primarily to large installations during the first nine months of 2008 without
comparable roll-outs during 2009. The decline in Asia was due primarily to weak
economic conditions in Japan and Hong Kong coupled with large chain-wide
installations in Australia and New Zealand during 2008 without comparable
roll-outs in 2009 offset. The decrease in Asia was partially offset by a large
chain-wide roll-out in China. Our EAS systems business is dependent upon new
store openings and the liquidity and financial condition of our customers which
has been impacted by current economic trends. Our plan is to partially mitigate
this issue by selling new solutions to existing customers and increasing our
market share through innovative products such as Evolve™.
The
CheckView™ business declined primarily due to decreases in the U.S. and Asia of
$28.3 million and $3.5 million, respectively. The U.S. revenues were
benefited by $1.0 million due to a 2008 banking business acquisition
without comparable revenues in 2009. The decline in our U.S. retail business was
$23.5 million, due primarily to an overall decline in capital expenditures
as a result of the current weak economic conditions in the U.S. Our banking
business, excluding the non-comparable acquisition, declined $5.8 million
due primarily to decreased customer spending as a result of the current economic
condition in the financial services sector. We anticipate our U.S. CheckView™
business will continue to experience difficulties this year as constraints on
capital spending by our customers and the slowing of new store openings will
likely continue as a result of the current economic conditions. The decline in
Asia was due primarily to large orders in Japan in 2008 without comparable
installations in 2009.
Our Alpha
business declined by $3.7 million during the first nine months of 2009 as
compared to the first nine months of 2008. The decrease was due primarily to
declines in revenues of $2.5 million in Europe and $2.4 million in the
U.S., which was partially offset by a $1.2 million increase in Asia. The
decrease in Europe was primarily due to a decrease in volumes due to the current
weak economic condition in Europe, which was partially offset by an increase in
revenues in the U.K. due to increased sales to a large customer. The decrease in
the U.S. was primarily due to a decrease in volumes with several large customers
due to the current weak economic condition in the U.S. The increase in Asia was
primarily due to an increase in Australia due to sales to several new large
customers during 2009.
EAS
consumables revenue increased by $1.6 million in the first nine months of 2009
as compared to the first nine months of 2008. The increase was due primarily to
increases in revenues of $3.5 million in the U.S. and $1.8 million in
Europe, which were partially offset by a $3.7 million decrease in Asia. The
increases in the U.S. and Europe were due primarily to the implementation of our
new hard tag at source program. Our hard tag at source program growth is a
result of our efforts to provide our customers with new innovative solutions
that help retailers address shrink at lower costs. Our EAS label business
decline was due to declines in Europe, North America, and Asia. The decline in
Europe and North America was due primarily to economic factors negatively
affecting retail sales and increased competition. The decline in Asia was due
primarily to the anticipated loss of customers associated with the acquisition
of SIDEP/Asialco.
RFID
revenues increased by $1.2 million during the first nine months of 2009 as
compared to the first nine months of 2008. The increase was due primarily to
increases in revenues of $0.8 million in the U.S. and $0.5 million in
Europe. The increase in the U.S. was primarily due to $1.4 million in
non-comparables OATSystems Inc. revenues during the first half of 2009, which
was partially offset by a decline in OATSystems Inc. revenues during the third
quarter of 2009 due to a decrease in non-recurring licensing fees in 2009. The
increase in revenues in Europe was due to the sale of detachers associated with
our hard tag at source program that are RFID enabled for future use. The
increase was partially offset by a decrease in Germany revenues due to a large
roll-out that was completed in 2008 with no such comparable roll-out during the
first nine months of 2009.
Apparel Labeling
Solutions
Apparel
Labeling Solutions revenues decreased by $4.1 million, or 4.1%, in the
first nine months of 2009 as compared to the first nine months of 2008. The
decrease was due primarily to the negative impact of foreign currency
translation of $6.6 million, which was partially offset by $4.0 million of
revenues from our newly acquired Brilliant business. The remaining decrease of
$1.5 million was due to a general overall decline resulting from current
economic conditions.
Retail Merchandising
Solutions
Retail
Merchandising Solutions revenues decreased by $18.8 million, or 25.9%, in
the first nine months of 2009 as compared to the first nine months of 2008. The
negative impact of foreign currency translation was approximately
$7.4 million. The remaining decrease in our RMS business was due to a
decrease in our revenues from RDS of $7.2 million and a decrease in
revenues of HLS of $4.1 million. Our RDS decline is due to a general reduction
of store remodel work in Europe due to the current economic environment. The
decrease in HLS is due to increased competition and pricing pressures as well as
a general shift in market demand away from HLS products as retail scanning
technology continues to grow worldwide. We anticipate RDS and HLS to continue to
face difficult revenue trends in 2009 due to the impact of current economic
conditions on the RDS business and continued shifts in market demand for HLS
products.
Gross
Profit
During
the first nine months of 2009, gross profit decreased by $53.2 million, or
18.8%, from $282.1 million to $228.9 million. The negative impact of
foreign currency translation on gross profit was approximately $13.7 million.
Gross profit, as a percentage of net revenues, increased from 41.5% to
42.8%.
Shrink Management
Solutions
Shrink
Management Solutions gross profit as a percentage of Shrink Management Solutions
revenues increased to 43.4% in the first nine months of 2009, from 41.4% in the
first nine months of 2008. The increase in the gross profit percentage of Shrink
Management Solutions was due primarily to higher margins in EAS systems,
CheckView™ and EAS labels, partially offset by lower margins in our Alpha
business. EAS systems margins improved due to product mix resulting from fewer
chain-wide rollouts in 2009, improved manufacturing margins, and lower royalties
due to the expiration of our EAS licensing obligation in December 2008.
CheckView™ margins improved due to better project management during 2009 and
cost control. EAS label margins improved due primarily to lower royalties due to
the expiration of our EAS licensing obligation in December 2008. Alpha
margins decreased in 2009 due to manufacturing variances related to lower
volumes and increased inventory reserves in 2009.
Apparel Labeling
Solutions
Apparel
Labeling Solutions gross profit as a percentage of Apparel Labeling Solutions
revenues increased to 37.9% in the first nine months of 2009, from 36.0% in the
first nine months of 2008. Apparel Labeling Solutions margins increased due
primarily to the better utilization of low cost manufacturing facilities, which
resulted in improved product costs and reductions in freight.
Retail Merchandising
Solutions
The
Retail Merchandising Solutions gross profit as a percentage of Retail
Merchandising Solutions revenues decreased to 47.6% in the first nine months of
2009, from 50.0% in the first nine months of 2008. The decrease in Retail
Merchandising Solutions gross profit percentage was primarily due to a decline
in margin in our HLS business resulting from manufacturing variances related to
a decline in volume and pricing pressures.
Selling,
General, and Administrative Expenses
Selling,
general, and administrative expenses (SG&A) decreased $34.0 million, or
15.2%, over the first nine months of 2008. Foreign currency translation
decreased selling, general, and administrative expenses by approximately $12.0
million. The remaining decrease was due primarily to lower bad debt expense,
$1.4 million of deferred compensation expense in 2008 without a comparable
charge in 2009, lower sales and marketing expense, and lower general and
administrative expenses. The decrease in bad debt expense was attributable to an
improved focus on working capital during the first nine months of 2009. The
decrease in sales and marketing expense corresponds to the decrease in revenues
over the prior year, coupled with an increased effort by management to reduce
costs. The decrease in general and administrative expense is due to efforts to
reduce costs, coupled with an additional expense that was incurred during the
second quarter of 2008 due to a change in executive management with no
comparable transition costs in 2009. The cost reduction efforts were due
primarily to better control of discretionary spending and the impact of our
temporary global payroll reduction and furlough program. These reductions were
partially offset by an increase of expenses related to our Brilliant acquisition
during the third quarter of 2009 coupled with $2.8 million of non-comparable
OATSystems, Inc. expenses during the first half of 2009.
Research
and Development Expenses
Research
and development (R&D) costs were $14.8 million, or 2.8% of revenues, in
the first nine months of 2009 and $16.3 million, or 2.4%, in the first nine
months of 2008. Foreign currency translation decreased R&D costs by
approximately $0.3 million. Non-comparable R&D expenses generated by
OATSystems, Inc. operations during the first half of 2009 were
$1.0 million. The remaining decrease was due to due to efforts to reduce
costs. The cost reduction efforts were due primarily to the impact of our
temporary global payroll reduction and furlough program.
Restructuring
Expenses
Restructuring
expenses were $1.2 million, or 0.2% of revenues, in the first nine months of
2009, and $4.8 million, or 0.7% of revenues, in the first nine months of
2008.
Litigation
Settlement
Litigation
expenses were $1.3 million, or 0.2% of revenues, in the first nine months
of 2009, and $0.5 million, or 0.1% of revenues, in the first nine months of
2008. Included in the 2009 litigation expense was $0.9 million of expense
related to the settlement of a dispute with a consultant and $0.4 million
related to the acquisition of a patent related to our Alpha business. We
purchased the patent for $1.7 million related to our Alpha business. A portion
of this purchase price was attributable to use prior to the date of acquisition
and as a result we recorded $0.4 million in litigation expense and $1.3 million
in intangibles.
Other
Operating Income
Other
operating income was $1.0 million, or 0.1% of revenues, in the first nine
months of 2008 with no comparable charge in the first nine months of 2009. The
2008 income relates to the sale of our Czech Republic subsidiary, which is now
operating as a distributor of our products.
Interest
Income
Interest
income for the first nine months of 2009 decreased $0.6 million from the
comparable nine months in 2008 due to a decrease in cash on hand during
2009.
Interest
Expense
Interest
expense for the first nine months of 2009 increased $1.1 million from the
comparable nine months in 2008 due to an increase in debt during
2009.
Other
Gain (Loss), net
Other
gain (loss), net increased by $2.4 million from the comparable nine months
in 2008. The increase was due primarily to a foreign exchange loss of
$2.2 million in 2008 as compared to a foreign exchange gain of
$0.1 million in 2009.
Income
Taxes
The
effective tax rate for the thirty-nine weeks ended September 27, 2009 was
60.7% as compared to 5.3% for the thirty-nine weeks ended September 28,
2008. Absent restructuring expense and the impact of valuation allowances, the
effective tax rate for the thirty-nine weeks ended September 27, 2009 was 41.3%
compared to 21.5% for the thirty-nine weeks ended September 28, 2008. The
primary change in the 2009 effective tax rate when compared to prior quarters is
the change in management’s expectation regarding the future realization of
deferred tax assets in Japan and Italy, resulting in discrete tax charges of
$2.5 million and $1.1 million, respectively. During the first nine months of
2008, we recorded a $7.4 million benefit relating to discrete
events. Significant items included in the $7.4 million were a
$4.8 million benefit relating to the release of a valuation allowance as a
result of strategic decisions related to foreign operations, a $1.1 million
release of unrecognized tax benefits due to a favorable conclusion of an
Australian tax audit, and a $1.7 million tax benefit related to
restructuring and deferred compensation expenses.
Net
Earnings Attributable to Checkpoint Systems, Inc.
Net
earnings attributable to Checkpoint Systems, Inc. were $7.6 million, or
$0.19 per diluted share, in the first nine months of 2009 compared to earnings
of $31.9 million, or $0.79 per diluted share, in the first nine months of
2008. The weighted-average number of shares used in the diluted earnings per
share computation were 39.5 million and 40.2 million for the first
nine months of 2009 and 2008, respectively.
Financial
Condition
Liquidity
and Capital Resources
Our
liquidity needs have related to, and are expected to continue to relate to,
acquisitions, capital investments, product development costs, potential future
restructuring related to the rationalization of the business, and working
capital requirements. We have met our liquidity needs over the last four years
primarily through cash generated from operations. Based on an analysis of
liquidity utilizing conservative assumptions for the next twelve months, we
believe that cash provided from operating activities and funding available under
our credit agreements should be adequate to service debt and working capital
needs, meet our capital investment requirements, other potential restructuring
requirements, and product development requirements.
The
recent financial and credit crisis has reduced credit availability and liquidity
for many companies. We believe, however, that the strength of our core business,
cash position, access to credit markets, and our ability to generate positive
cash flow will sustain us through this challenging period. We are working to
reduce our liquidity risk by accelerating efforts to improve working capital
while reducing expenses in areas that will not adversely impact the future
potential of our business. Additionally, we have increased our monitoring of
counterparty risk. We evaluate the creditworthiness of all existing and
potential counterparties for all debt, investment, and derivative transactions
and instruments. Our policy allows us to enter into transactions with nationally
recognized financial institutions with a credit rating of “A” or higher as
reported by one of the credit rating agencies that is a nationally recognized
statistical rating organization by the U.S. Securities and Exchange Commission.
The maximum exposure permitted to any single counterparty is $50.0 million.
Counterparty credit ratings and credit exposure are monitored monthly and
reviewed quarterly by our Treasury Risk Committee.
As of
September 27, 2009, our cash and cash equivalents were $114.8 million
compared to $132.2 million as of December 28, 2008. Cash and cash
equivalents decreased in 2009 primarily due to $39.9 million of cash used in
financing activities and $35.7 million of cash used in investing activities,
partially offset by $54.2 million of cash provided by operating activities.
Cash from operating activities improved $27.2 million in 2009 compared to
2008, primarily due to improvements in accounts receivable and inventory
management, which were partially offset by lower earnings. The improvement in
accounts receivable in 2009 resulted primarily from a decrease in the sales
activity during the first nine months of 2009 as compared to the first nine
months of 2008 coupled with a concentrated effort to improve working capital
through enhanced collection efforts. The improvement in inventory was primarily
the result of improved inventory management and lower revenues for the first
nine months of 2009 compared to the first nine months of 2008, which resulted in
lower inventory levels. Cash used in investing activities was
$17.9 million less in
2009 compared to 2008. This was due primarily to the amount paid for the
acquisitions of OATSystems, Inc. and Security Corporation, Inc. in 2008, which
was partially offset by the amount paid for Brilliant in 2009, and a decrease in
the acquisitions of property, plant and equipment and intangible assets in
2009. Cash used in financing activities was
$40.0 million greater
in 2009 compared to 2008. This was due primarily to a $23 million payment to
retire the senior unsecured multi-currency credit facility and an $8.5 million
payment to extinguish our existing Japanese local line of credit during the
first nine months of 2009, coupled with an increase in borrowings in 2008 that
was used to finance our stock repurchase program and OATSystems, Inc.
acquisition.
Our
percentage of total debt to total equity as of September 27, 2009, was 24.0%
compared to 28.8% as of December 28, 2008.
We
continue to reinvest in the Company through our investment in technology and
process improvement. In the first nine months of 2009, our investment in
research and development amounted to $14.8 million, as compared to
$16.3 million in 2008. These amounts are reflected in the cash generated
from operations, as we expense our research and development as it is incurred.
In 2009, we anticipate spending of approximately $7 million on research and
development for the remainder of 2009.
We have
various unfunded pension plans outside the U.S. These plans have significant
pension costs and liabilities that are developed from actuarial valuations. For
the first nine months of 2009, our contribution to these plans was
$3.8 million. Our funding expectation for 2009 is $5.1 million. We
believe our current cash position, cash generated from operations, and the
availability of cash under our revolving line of credit will be adequate to fund
these requirements.
Acquisition
of property, plant, and equipment and intangibles during the first nine months
of 2009 totaled $10.3 million compared to $12.3 million during the first nine
months of 2008. During 2009, our acquisition of property, plant, and equipment
and intangibles consisted of $9.0 million of capital expenditures and $1.3
million was related to the purchase of a patent. We anticipate our capital
expenditures, used primarily to upgrade technology and improve our production
capabilities, to approximate $4 million for the remainder of
2009.
In July
2009, the Company entered into an agreement to purchase the business of
Brilliant, a China-based manufacturer of woven and printed labels, and settled
the acquisition on August 14, 2009 for approximately $38.3 million,
including cash acquired of $0.6 million and the assumption of debt of $19.6
million. The payment to acquire Brilliant is reflected in the acquisition of
businesses line within investing activities on the consolidated statement of
cash flows. During the third quarter of 2009, $9.0 million of debt payments were
made and consisted of $4.2 million of the current portion of long-term debt,
$3.1 million in factoring payments, and $1.7 million of bank overdraft
payments.
Our
Brilliant business has variable interest rate full-recourse factoring
arrangements of accounts receivable with a maximum limit of $3.2 million (HKD
25.0 million) and totaled $2.9 million (HKD 22.1 million) as of September 27,
2009. The arrangements are secured by trade receivables. The arrangement bears
interest of HKD Prime Rate + 1.00%. On September 27, 2009, the
interest rate was 6.00%. The factoring arrangement is included in
short-term borrowings in the accompanying consolidated balance sheets. Factoring
payments were included in the cash used in financing activities section of our
consolidated statement of cash flows.
Our
Brilliant business has a banking facility that includes trade finance
facilities, an overdraft facility, and a short term money market
loan. The aggregate amount outstanding under the banking facility
totaled $1.6 million (HKD 12.6 million) as of September 27, 2009. The
banking facility is secured by a fixed cash deposit of $0.5 million (HKD 4.0
million). Interest rates on these arrangements range from HKD Prime
Rate + 0.75% to HKD Prime Rate + 1.75%. The weighted average interest
rate on these arrangements at September 27, 2009 is 6.41%. The
banking facility is included in short-term borrowings and the secured cash
deposit is recorded within restricted cash in the accompanying consolidated
balance sheets. Factoring payments and overdraft payments were included in the
cash used in financing activities section of our consolidated statement of cash
flows.
Brilliant’s
overdraft facilities have a maximum borrowing limit of $0.8 million (HKD 6.2
million) and totaled $0.7 million (HKD 5.1 million) at September 27,
2009. The facilities are secured by a fixed cash deposit of $0.6
million (HKD 5.0 million). The interest rates on these arrangements range from
HKD Prime Rate + 1.75% to HKD Prime Rate + 2.25%. On September 27,
2009, the weighted average interest rate on the overdraft facilities is
6.86%. The overdraft facilities are included in short-term borrowings
and the secured cash deposit is recorded within restricted cash in the
accompanying consolidated balance sheets. Overdraft payments were included in
the cash used in financing activities section of our consolidated statement of
cash flows.
On
November 1, 2007, Checkpoint Systems, Inc. and one of its direct
subsidiaries (collectively, the “Company”) and Alpha Security Products, Inc. and
one of its direct subsidiaries (collectively, “the Seller”) entered into an
Asset Purchase Agreement and a Dutch Assets Sale and Transfer Agreement
(collectively, the “Agreements”) under which the Company purchased all of the
assets of Alpha’s S3 business (the “Acquisition”) for approximately
$142 million, subject to a post-closing working capital adjustment, plus
additional performance-based contingent payments up to a maximum of $8 million
plus interest thereon. The purchase price was funded by $67 million of cash
and $75 million of borrowings under our senior unsecured credit facility.
Subject to the Agreements, contingent payments were earned if the revenue
derived from the S3 business exceeded $70 million during the period from
December 31, 2007, until December 28, 2008. In the event that the
revenue derived from the S3 business exceeded $83 million during such
period, the Seller was entitled to a maximum payment of $8 million. During
the fourth fiscal quarter ended December 28, 2008, revenues for the S3
business exceeded the minimum contingency payment thresholds. An accrual of
$6.8 million was recognized at December 28, 2008 for the contingent
payment, with a corresponding increase to goodwill recorded on the acquisition.
The payment of $6.8 million was made during the first quarter of 2009, and
is reflected in the acquisition of businesses line within investing activities
on the consolidated statement of cash flows.
During
the second quarter of 2009, our outstanding Asialco loans were paid down and a
loan was renewed in April 2009 for a 12 month period. As of September 27,
2009, our outstanding Asialco loan balance is $3.7 million
(RMB25 million) and has a maturity date of April 2010. The loan is included
in short-term borrowings in the accompanying consolidated balance sheets. Upon
maturity of the Asialco loans, the Company intends to renew the outstanding
borrowings for a period of one year.
In August
2009, $8.5 million (¥800 million) was paid in order to extinguish our existing
Japanese local line of credit. The line of credit was included in short-term
borrowings in the accompanying consolidated balance sheets.
On
April 30, 2009, we entered into a new $125.0 million three-year senior
secured multi-currency revolving credit agreement (the “Secured Credit
Facility”) with a syndicate of lenders. The Secured Credit Facility replaces the
$150.0 million senior unsecured multi-currency credit facility (the “Senior
Unsecured Credit Facility”) arranged in December 2005. Prior to entering
into the Secured Credit Facility, $23.0 million of the Senior Unsecured Credit
Facility was paid down during the second quarter of 2009. We paid fees of $3.9
million to enter into the Secured Credit Facility, which were capitalized as
deferred debt issuance costs and are amortized over the term of the
agreement.
The
Secured Credit Facility also includes an expansion option that gives us the
right to increase the aggregate revolving commitment by an amount up to
$50 million, for a potential total commitment of $175 million. The
expansion option allows the additional $50 million in increments of $25 million
based upon consolidated earnings before interest, taxes, and depreciation and
amortization (EBITDA) on June 28, 2009 and December 27, 2009, respectively.
Based on our consolidated EBITDA at June 28, 2009, we qualified to request the
initial $25 million expansion option for a total potential commitment of $150
million.
Borrowings
under the Secured Credit Facility bear interest at rates of LIBOR plus an
applicable margin ranging from 2.50% to 3.75% and/or prime plus 1.50% to 2.75%
based on our leverage ratio of consolidated funded debt to EBITDA. Under the
Secured Credit Facility, we pay an unused line fee ranging from 0.30% to 0.75%
per annum on the unused portion of the commitment. Our availability under the
Secured Credit Facility will be reduced by letters of credit of up to
$25 million, of which $1.4 million are outstanding at
September 27, 2009. There are no other restrictions on our ability to draw
down on the available portion of our Secured Credit Facility.
The
Secured Credit Facility contains certain covenants that include requirements for
a maximum ratio of debt to EBITDA, a maximum ratio of interest to EBITDA, and a
maximum threshold for capital expenditures. As of September 27, 2009, we
were in compliance with all covenants. The Secured Credit Facility contains
covenants that include requirements for a maximum debt to EBITDA ratio of 2.75,
a minimum fixed charge coverage ratio of 1.25 as well as other affirmative and
negative covenants. Based upon our projections, we do not anticipate any issues
with meeting our existing debt covenants over the next twelve
months.
We have
never paid a cash dividend (except for a nominal cash distribution in
April 1997 to redeem the rights outstanding under our 1988 Shareholders’
Rights Plan). We do not anticipate paying any cash dividends in the near
future.
As we
continue to implement our strategic plan in a volatile global economic
environment, our focus will remain on operating our business in a manner that
addresses the reality of the current economic marketplace without sacrificing
the capability to effectively execute our strategy when economic conditions and
the retail environment stabilize. Based upon an analysis of liquidity using our
current forecast, management believes that our anticipated cash needs can be
funded from cash and cash equivalents on hand, the availability of cash under
the new $125.0 million Secured Credit Facility and cash generated from
future operations over the next twelve months.
Provisions
for Restructuring
Restructuring
expense for the three and nine month periods ended September 27, 2009 and
September 28, 2008 was as follows:
(amounts in
thousands)
|
|
Quarter
(13
weeks) Ended
|
|
Nine
Months
(39
weeks) Ended
|
|
|
September
27,
2009
|
September
28,
2008
|
|
September
27,
2009
|
September
28,
2008
|
|
|
|
|
|
|
|
|
Manufacturing
Restructuring Plan
|
|
|
|
|
|
|
Severance
and other employee-related charges
|
$ 1
|
$ 162
|
|
$ 24
|
$ 741
|
|
2005
Restructuring Plan
|
|
|
|
|
|
|
Severance
and other employee-related charges
|
152
|
409
|
|
1,188
|
3,357
|
|
Lease
termination costs
|
—
|
(1)
|
|
—
|
71
|
|
Asset
impairment
|
—
|
(3)
|
|
—
|
398
|
|
Acquisition
restructuring costs
|
—
|
281
|
|
—
|
281
|
|
Total
|
$
153
|
$ 848
|
|
$ 1,212
|
$
4,848
|
Restructuring
accrual activity for the nine months ended September 27, 2009 was as
follows:
(amounts in
thousands)
|
|
Accrual
at
Beginning
of
Year
|
Charged
to
Earnings
|
Charge
Reversed
to
Earnings
|
Cash
Payments
|
Other
|
Exchange
Rate
Changes
|
Accrual
at
9/27/2009
|
|
Manufacturing
Restructuring Plan
|
|
|
|
|
|
|
|
|
Severance
and other employee-related charges
|
$ 652
|
$ 157
|
$
(133)
|
$ (670)
|
$ —
|
$
(6)
|
$ —
|
|
2005
Restructuring Plan
|
|
|
|
|
|
|
|
|
Severance
and other employee-related charges
|
3,302
|
1,439
|
(251)
|
(3,845)
|
—
|
(31)
|
614
|
|
Acquisition
restructuring costs
(1)
|
568
|
—
|
—
|
(150)
|
(322)
|
(7)
|
89
|
|
Total
|
$
4,522
|
$
1,596
|
$
(384)
|
$
(4,665)
|
$
(322)
|
$
(44)
|
$
703
|
(
1) During 2007, restructuring
costs of $1.2 million included as a cost of the SIDEP acquisition
($1.1 million related to employee severance and $0.1 million related
to the cost to abandon facilities) were accounted for under Emerging Issues Task
Force Issue No. 95-3 “Recognition of Liabilities in Connection with
Purchase Business Combinations.” These costs were recognized as an assumed
liability in the acquisition and were included in the purchase price allocation
at November 9, 2007. During the first nine months of 2009, $0.3 million of
the acquisition restructuring liability was reversed related to the SIDEP
acquisition.
Manufacturing
Restructuring Plan
In
August 2008, we announced a manufacturing and supply chain restructuring
program designed to accelerate profitable growth in our Apparel Labeling
Solutions (ALS), formerly Check-Net®, business and to support
incremental improvements in our EAS systems and labels businesses.
For the
nine months ended September 27, 2009, there was a net charge to earnings of $24
thousand recorded in connection with the Manufacturing Restructuring
Plan.
As of
September 27, 2009, the total number of employees affected by the Manufacturing
Restructuring Plan were 76, of which all have been terminated. The remaining
anticipated costs are expected to be incurred through the end of 2010 and are
expected to approximate $3.0 million to $4.0 million, of which
$1.6 million has been incurred and paid. Termination benefits are planned
to be paid one month to 24 months after termination. Upon completion, the
annual savings are anticipated to be approximately $6 million.
2005
Restructuring Plan
In the
second quarter of 2005, we initiated actions focused on reducing our overall
operating expenses. This plan included the implementation of a cost reduction
plan designed to consolidate certain administrative functions in Europe and a
commitment to a plan to restructure a portion of our supply chain manufacturing
to lower cost areas. During the fourth quarter of 2006, we continued to review
the results of the overall initiatives and added an additional reduction focused
on the reorganization of senior management to focus on key markets and
customers. This additional restructuring reduced our management by
25%.
For the
nine months ended September 27, 2009, a net charge of $1.2 million was
recorded in connection with the 2005 Restructuring Plan. The charge was composed
of severance accruals and related costs.
The total
number of employees affected by the 2005 Restructuring Plan were 897, of which
all have been terminated. The anticipated total cost is expected to approximate
$32 million, of which $32 million has been incurred and $31 million
paid. Termination benefits are planned to be paid one month to 24 months
after termination. Upon completion, the annual savings are anticipated to be
approximately $36 million.
Off-Balance
Sheet Arrangements and Contractual Obligations
There
have been no material changes to the table presented in our Annual Report on
Form 10-K for the year ended December 28, 2008. The table of contractual
obligations excludes our gross liability for uncertain tax positions, including
accrued interest and penalties, which totaled $19.5 million as of September
27, 2009, and $18.5 million as of December 28, 2008, since we cannot
predict with reasonable reliability the timing of cash settlements to the
respective taxing authorities.
Recently
Adopted Accounting Standards
In
September 2009, we adopted ASC 105-10-05, which provides for the FASB Accounting
Standards Codification™ (the “Codification”) to become the single official
source of authoritative, nongovernmental U.S. generally accepted accounting
principles (“GAAP”) to be applied by nongovernmental entities in the preparation
of financial statements in conformity with GAAP. The Codification does not
change GAAP, but combines all authoritative standards into a comprehensive,
topically organized online database. ASC 105-10-05 explicitly recognizes rules
and interpretative releases of the Securities and Exchange Commission (SEC)
under federal securities laws as authoritative GAAP for SEC registrants.
Subsequent revisions to GAAP will be incorporated into the ASC through
Accounting Standards Updates (ASU). ASC 105-10-05 is effective for
interim and annual periods ending after September 15, 2009, and was effective
for us in the third quarter of 2009. The adoption of ASC 105-10-05 impacted the
Company’s financial statement disclosures, as all references to authoritative
accounting literature were updated to and in accordance with the Codification.
Our adoption of ASC 105-10-05 did not have a material impact on our consolidated
results of operations and financial condition.
In
December 2007, the FASB issued an accounting standard codified within ASC
805, “Business Combinations” which changed the accounting for business
acquisitions. Under this standard, business combinations continue to
be required to be accounted for at fair value under the acquisition method of
accounting, but the standard changed the method of applying the acquisition
method in a number of significant aspects. Acquisition costs will generally be
expensed as incurred; noncontrolling interests will be valued at fair value at
the acquisition date; in-process research and development will be recorded at
fair value as an indefinite-lived intangible asset at the acquisition date,
until either abandoned or completed, at which point the useful lives will be
determined; restructuring costs associated with a business combination will
generally be expensed subsequent to the acquisition date; and changes in
deferred tax asset valuation allowances and income tax uncertainties after the
acquisition date generally will affect income tax expense. The standard is
effective on a prospective basis for all business combinations for which the
acquisition date is on or after the beginning of the first annual period
subsequent to December 15, 2008, with the exception of the accounting for
valuation allowances on deferred taxes and acquired tax contingencies. The
standard amends the accounting for income taxes such that adjustments made to
valuation allowances on deferred taxes and acquired tax contingencies associated
with acquisitions that closed prior to the effective date of the standard would
also apply the provisions of the new standard. Disclosure requirements were also
expanded to enable the evaluation of the nature and financial effects of the
business combination. For the Company, the standard is effective for business
combinations occurring after December 28, 2008. Adoption of the standard
did not have a significant impact on our financial position and results of
operations; however, any business combination entered into after the adoption
may significantly impact our financial position and results of operations when
compared to acquisitions accounted for under prior GAAP and result in more
earnings volatility and generally lower earnings due to the expensing of deal
costs and restructuring costs of acquired companies. This standard was applied
to business combinations disclosed in Note 4 that were completed after
2008. Also, since we have significant acquired deferred tax assets
for which full valuation allowances were recorded at the acquisition date, the
standard could significantly effect the results of operations if changes in the
valuation allowances occur subsequent to adoption. As of September 27,
2009, such deferred tax valuation allowances amounted to
$4.6 million.
In
February 2009, the FASB issued an accounting standard codified within ASC
805, “Business Combinations” which amends the provisions related to the initial
recognition and measurement, subsequent measurement, and disclosure of assets
and liabilities arising from contingencies in a business combination. The
standard applies to all assets acquired and liabilities assumed in a business
combination that arise from contingencies that would be within the scope of ASC
450, “Contingencies”, if not acquired or assumed in a business combination,
except for assets or liabilities arising from contingencies that are subject to
specific guidance in ASC 805. The standard applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. The
adoption of the standard effective December 29, 2008 did not have an impact
on our financial position and results of operations.
In
December 2007, the FASB issued an accounting standard codified within ASC
810, “Consolidation”. The standard establishes accounting and
reporting standards for ownership interests in subsidiaries held by parties
other than the parent, the amount of consolidated net income attributable to the
parent and to the noncontrolling interest, changes in a parent’s ownership
interest, and the valuation of retained noncontrolling equity investments when a
subsidiary is deconsolidated. Noncontrolling interest (minority
interest) is required to be recognized as equity in the consolidated financial
statements and separate from the parent’s equity. The standard also establishes
disclosure requirements that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling owners. The
effective date of the standard is for fiscal years beginning after
December 15, 2008. We adopted the standard on December 29, 2008. As of
September 27, 2009, our noncontrolling interest totaled $0.7 million,
which is included in the stockholders’ equity section of our Consolidated
Balance Sheets. The Company has incorporated presentation and disclosure
requirements in our consolidated financial statements for the first nine months
of 2009.
In March
2008, the FASB issued an accounting standard related to disclosures about
derivative instruments and hedging activities, codified within ASC 815,
“Derivatives and Hedging”. Provisions of this standard change the
disclosure requirements for derivative instruments and hedging activities
including enhanced disclosures about (a) how and why derivative instruments
are used, (b) how derivative instruments and related hedged items are
accounted for under ASC 815 and its related interpretations, and (c) how
derivative instruments and related hedged items affect our financial position,
financial performance, and cash flows. This statement was effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008. We adopted the standard on December 29, 2008. See
Note 10 for our enhanced disclosures required under this standard.
In
April 2008, the FASB issued an accounting standard codified within ASC 350,
“Intangibles - Goodwill and Other” which amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset Under this standard,
entities estimating the useful life of a recognized intangible asset must
consider their historical experience in renewing or extending similar
arrangements or, in the absence of historical experience, must consider
assumptions that market participants would use about renewal or
extension. The intent of the standard is to improve the consistency
between the useful life of a recognized intangible asset and the period of
expected cash flows used to measure the fair value of the asset. Adoption of the
standard was effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal
years. We adopted the standard on December 29, 2008. We do not expect the
standard to have a material impact on our accounting for future acquisitions of
intangible assets.
In
June 2008, the FASB issued an accounting standard codified within ASC 260,
“Earnings Per Share” which provides that unvested share-based payment awards
that contain nonforfeitable rights to dividends or dividend equivalents (whether
paid or unpaid) are participating securities and shall be included in the
computation of earnings per share pursuant to the two-class method. The standard
is effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Upon
adoption, an entity is required to retrospectively adjust its earnings per share
data (including any amounts related to interim periods, summaries of earnings
and selected financial data) to conform to the standard’s provisions. We adopted
this pronouncement effective December 29, 2008 and the adoption did not
have an impact on our calculation of earnings per share.
In
November 2008, the FASB issued an accounting standard codified within ASC
350, “Intangibles - Goodwill and Other” that applies to defensive assets which
are acquired intangible assets which the acquirer does not intend to actively
use, but intends to hold to prevent its competitors from obtaining access to the
asset. The standard clarifies that defensive intangible assets are separately
identifiable and should be accounted for as a separate unit of accounting in
accordance with guidance provided within ASC 805, “Business Combinations” and
ASC 820, “Fair Value Measurements and Disclosures”. The standard is
effective for intangible assets acquired in fiscal years beginning on or after
December 15, 2008 and will be applied by us to intangible assets acquired
on or after December 29, 2008.
In
December 2008, the FASB issued an accounting standard codified within ASC
810, “Consolidation” and ASC 860, “Transfers and Servicing”. The standard was
effective for the first reporting period ending after December 15, 2008 and
requires additional disclosures concerning transfers of financial assets and an
enterprise’s involvement with variable interest entities (VIE) and qualifying
special purpose entities under certain conditions. Upon adoption in our interim
consolidated financial statements for the quarter ending March 29, 2009,
there were no required disclosures.
In
April 2009, the FASB issued an accounting standard codified within ASC 825,
“Financial Instruments” (ASC 825-10-65) that requires disclosures about the fair
value of financial instruments that are not reflected in the consolidated
balance sheets at fair value whenever summarized financial information for
interim reporting periods is presented. Entities are required to disclose the
methods and significant assumptions used to estimate the fair value of financial
instruments and describe changes in methods and significant assumptions, if any,
during the period. The standard is effective for interim reporting periods
ending after June 15, 2009 and was adopted by the Company in the second
quarter of 2009. See Note 10 for our disclosures required under the
standard.
In
April 2009, the FASB issued an accounting standard codified within ASC 820,
“Fair Value Measurements and Disclosures,” which provides guidance on
determining fair value when there is no active market or where the price inputs
being used represent distressed sales. The standard reaffirms the
objective of fair value measurement, which is to reflect how much an asset would
be sold for in an orderly transaction. It also reaffirms the need to use
judgment to determine if a formerly active market has become inactive, as well
as to determine fair values when markets have become inactive. The standard is
effective for interim and annual periods ending after June 15, 2009 and was
adopted by the Company in the second quarter of 2009. The adoption of this
accounting pronouncement did not have a material impact on our consolidated
results of operations and financial condition.
In
May 2009, the FASB issued an accounting standard codified within ASC 855
“Subsequent Events,” which sets forth general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. It
requires the disclosure of the date through which an entity has evaluated
subsequent events and the basis for that date, that is, whether that date
represents the date the financial statements were issued or were available to be
issued. The standard is effective for interim or annual periods
ending after June 15, 2009 and was adopted by the Company in the second quarter
of 2009. The adoption of this standard did not have a material impact
on our consolidated results of operations and financial
condition. See Note 1, “Basis of Accounting” for the required
disclosures.
In August
2009, the FASB issued ASU No. 2009-04, “Accounting for Redeemable Equity
Instruments.” The ASU represents an update to ASC 480-10-S99
“Distinguishing Liabilities from Equity.” This update provides
guidance on what type of instruments should be classified as temporary versus
permanent equity, as well as guidance with respect to
measurement. The adoption of the ASU did not have a material impact
on our consolidated results of operations and financial condition.
New
Accounting Pronouncements and Other Standards
In
December 2008, the FASB issued an accounting standard codified within ASC
715, “Compensation – Retirement Benefits” that requires enhanced disclosures
about the plan assets of a Company’s defined benefit pension and other
postretirement plans. The enhanced disclosures are intended to provide users of
financial statements with a greater understanding of: (1) how investment
allocation decisions are made, including the factors that are pertinent to an
understanding of investment policies and strategies; (2) the major
categories of plan assets; (3) the inputs and valuation techniques used to
measure the fair value of plan assets; (4) the effect of fair value
measurements using significant unobservable inputs (Level 3) on changes in plan
assets for the period; and (5) significant concentrations of risk within
plan assets. The disclosures under this standard are effective for us for the
fiscal year ending December 27, 2009. We are currently
evaluating the requirements of these additional disclosures.
In June
2009, the FASB issued FAS 166, “Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities,” which has yet to be
codified in the ASC. Once codified, the standard would amend ASC 860
“Transfers and Servicing” by: eliminating the concept of a qualifying
special-purpose entity (QSPE); clarifying and amending the derecognition
criteria for a transfer to be accounted for as a sale; amending and clarifying
the unit of account eligible for sale accounting; and requiring that a
transferor initially measure at fair value and recognize all assets obtained
(for example beneficial interests) and liabilities incurred as a result of a
transfer of an entire financial asset or group of financial assets accounted for
as a sale. Additionally, on and after the effective date, existing QSPEs (as
defined under previous accounting standards) must be evaluated for consolidation
by reporting entities in accordance with the applicable consolidation guidance.
The standard requires enhanced disclosures about, among other things, a
transferor’s continuing involvement with transfers of financial assets accounted
for as sales, the risks inherent in the transferred financial assets that have
been retained, and the nature and financial effect of restrictions on the
transferor’s assets that continue to be reported in the statement of financial
position. The standard will be effective as of the beginning of
interim and annual reporting periods that begin after November 15, 2009,
which for us would be December 28, 2009, the first day of our 2010 fiscal
year. We are currently evaluating the impact of this standard on our
consolidated results of operations and financial condition.
In
June 2009, the FASB issued FAS 167 “Amendments to FASB Interpretation
No. 46(R),” which has yet to be codified within the ASC. Once
codified, the standard would amend ASC 810, “Consolidation” to address the
elimination of the concept of a qualifying special purpose
entity. The standard also replaces the quantitative-based risks and
rewards calculation for determining which enterprise has a controlling financial
interest in a variable interest entity with an approach focused on identifying
which enterprise has the power to direct the activities of a variable interest
entity and the obligation to absorb losses of the entity or the right to receive
benefits from the entity. This standard also requires continuous reassessments
of whether an enterprise is the primary beneficiary of a VIE whereas previous
accounting guidance required reconsideration of whether an enterprise was the
primary beneficiary of a VIE only when specific events had
occurred. The standard provides more timely and useful information
about an enterprise’s involvement with a variable interest entity
and will be effective as of the beginning of interim and annual
reporting periods that begin after November 15, 2009, which for us would be
December 28, 2009, the first day of our 2010 fiscal year. We are
currently evaluating the impact of this standard on our consolidated results of
operations and financial condition.
In August
2009, the FASB issued ASU No. 2009-05, “Fair Value Measurements and
Disclosures – Measuring Liabilities at Fair Value.”. The ASU provides additional
guidance for the fair value measurement of liabilities under ASC 820 “Fair Value
Measurements and Disclosures”. The ASU provides clarification that in
circumstances in which a quoted price in an active market for the identical
liability is not available, a reporting entity is required to measure fair value
using certain techniques. The ASU also clarifies that when estimating the fair
value of a liability, a reporting entity is not required to include a separate
input or adjustment to other inputs relating to the existence of a restriction
that prevents the transfer of a liability. It also clarifies that both a quoted
price in an active market for the identical liability at the measurement date
and the quoted price for the identical liability when traded as an asset in an
active market when no adjustments to the quoted price of the asset are required
are Level 1 fair value measurements. The ASU is effective for the
first interim reporting period beginning after its issuance, which for us would
be the fourth fiscal quarter of 2009. The adoption of the ASU is not
expected to have a material impact on our consolidated results of operations and
financial condition.
In
October 2009, the FASB issued ASU 2009-13, “Multiple-Deliverable Revenue
Arrangements, (amendments to ASC Topic 605, Revenue Recognition)” (ASU 2009-13)
and ASU 2009-14, “Certain Arrangements That Include Software Elements,
(amendments to ASC Topic 985, Software)” (ASU 2009-14). ASU 2009-13
requires entities to allocate revenue in an arrangement using estimated selling
prices of the delivered goods and services based on a selling price hierarchy.
The amendments eliminate the residual method of revenue allocation and require
revenue to be allocated using the relative selling price method. ASU
2009-14 removes tangible products from the scope of software revenue guidance
and provides guidance on determining whether software deliverables in an
arrangement that includes a tangible product are covered by the scope of the
software revenue guidance. ASU 2009-13 and ASU 2009-14 should be applied on
a prospective basis for revenue arrangements entered into or materially modified
in fiscal years beginning on or after June 15, 2010, with early adoption
permitted. We are currently evaluating the impact of the adoption of these ASUs
on the Company’s consolidated results of operations or financial
condition.
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Except as
noted below, there have been no significant changes to the market risks as
disclosed in Item 7A. “Quantitative And Qualitative Disclosures About Market
Risk” of our Annual Report on Form 10-K filed for the year ended December 28,
2008.
Exposure
to Foreign Currency
We
manufacture products in the U.S., the Caribbean, the U.K., Europe, and the Asia
Pacific regions for both the local marketplace, and for export to our foreign
subsidiaries. These subsidiaries, in turn, sell these products to customers in
their respective geographic areas of operation, generally in local currencies.
This method of sale and resale gives rise to the risk of gains or losses as a
result of currency exchange rate fluctuations on the inter-company receivables
and payables. Additionally, the sourcing of products in one currency and the
sales of products in a different currency can cause gross margin fluctuations
due to changes in currency exchange rates.
We
selectively purchase currency forward exchange contracts to reduce the risks of
currency fluctuations on short-term inter-company receivables and payables.
These contracts guarantee a predetermined exchange rate at the time the contract
is purchased. This allows us to shift the effect of positive or negative
currency fluctuations to a third party. Transaction gains or losses
resulting from these contracts are recognized at the end of each reporting
period. We use the fair value method of accounting, recording realized and
unrealized gains and losses on these contracts. These gains and losses are
included in other gain (loss), net on our consolidated statements of
operations. As of September 27, 2009, we had currency forward
exchange contracts with notional amounts totaling approximately
$12.6 million. The fair value of the forward exchange contracts was
reflected as a $136 thousand asset and is included in other current assets in
the accompanying balance sheets. The contracts are in the various local
currencies covering primarily our North American, Western European, Canadian,
and Australian operations. Historically, we have not purchased currency forward
exchange contracts where it is not economically efficient, specifically for our
operations in South America and Asia.
Hedging
Activity
Beginning
in the second quarter of 2008, we entered into various foreign currency
contracts to reduce our exposure to forecasted Euro-denominated inter-company
revenues. These contracts were designated as cash flow hedges. The foreign
currency contracts mature at various dates from October 2009 to June 2010.
The purpose of these cash flow hedges is to eliminate the currency risk
associated with Euro-denominated forecasted revenues due to changes in exchange
rates. These cash flow hedging instruments are marked to market and the changes
are recorded in other comprehensive income. Amounts recorded in other
comprehensive income are recognized in cost of goods sold as the inventory is
sold to external parties. Any hedge ineffectiveness is charged to other gain
(loss), net on our consolidated statements of operations. As of
September 27, 2009, the fair value of these cash flow hedges were reflected as a
$0.6 million liability and are included in other current liabilities in the
accompanying consolidated balance sheets. The total notional amount of these
hedges is $15.1 million (€10.8 million) and the unrealized loss
recorded in other comprehensive income was $1.1 million (net of taxes of
$23 thousand), of which the full amount is expected to be reclassified to
earnings over the next twelve months. During the three and nine month periods
ended September 27, 2009, a $0.1 million and $2.1 million benefit related
to these foreign currency hedges was recorded to cost of goods sold as the
inventory was sold to external parties, respectively. The Company recognized a
zero and $8 thousand loss during the three and nine months ended September 27,
2009 for hedge ineffectiveness, respectively.
During
the first quarter of 2008, we entered into an interest rate swap agreement with
a notional amount of $40 million and a maturity date of February 18,
2010. The purpose of this interest rate swap agreement is to hedge potential
changes to our cash flows due to the variable interest nature of our senior
unsecured credit facility. The interest rate swap was designated as a cash flow
hedge. This cash flow hedging instrument is marked to market and the changes are
recorded in other comprehensive income. Any hedge ineffectiveness is charged to
interest expense. As of September 27, 2009, the fair value of
the interest rate swap agreement was reflected as a $0.4 million liability
and is included in other current liabilities in the accompanying consolidated
balance sheets and the unrealized loss recorded in other comprehensive income
was $0.3 million (net of taxes of $0.1 million). We estimate that the full
amount of the loss in accumulated other comprehensive income will be
reclassified to earnings over the next twelve months. The Company
recognized no hedge ineffectiveness during the three and nine months ended
September 27, 2009.
Evaluation
of Disclosure Controls and Procedures
Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we have evaluated the
effectiveness of our disclosure controls and procedures (as defined in
Rule 13a - 15(e) under the Exchange Act) as of the end of the period
covered by this report. Based on that evaluation, our Chief Executive Officer
and Chief Financial Officer have concluded that the Company's disclosure
controls and procedures were effective as of the end of the period covered by
this report.
Changes
in Internal Controls
There
have been no changes in our internal controls over financial reporting that
occurred during the Company's third fiscal quarter of 2009 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
We are
involved in certain legal actions, all of which have arisen in the ordinary
course of business, except for the matters described in the following
paragraphs. Management believes that the ultimate resolution of such matters is
unlikely to have a material adverse effect on our consolidated results of
operations and/or financial condition, except as described below:
Matter
related to All-Tag Security S.A., et al
We
originally filed suit on May 1, 2001, alleging that the disposable,
deactivatable radio frequency security tag manufactured by All-Tag Security S.A.
and All-Tag Security Americas, Inc.’s (jointly “All-Tag”) and sold by
Sensormatic Electronics Corporation (Sensormatic) infringed on a U.S. Patent
No. 4,876,555 (Patent) owned by us. On April 22, 2004, the United
States District Court for the Eastern District of Pennsylvania granted summary
judgment to defendants All-Tag and Sensormatic on the ground that our Patent was
invalid for incorrect inventorship. We appealed this decision. On June 20,
2005, we won an appeal when the Federal Circuit reversed the grant of summary
judgment and remanded the case to the District Court for further proceedings. On
January 29, 2007 the case went to trial. On February 13, 2007, a jury
found in favor of the defendants on infringement, the validity of the Patent and
the enforceability of the Patent. On June 20, 2008, the Court entered
judgment in favor of defendants based on the jury’s infringement and
enforceability findings. On February 10, 2009, the Court granted
defendants’ motions for attorneys’ fees under Section 285 of the Patent
Statute. The district court will have to quantify the amount of attorneys’ fees
to be awarded, but it is expected that defendants will request approximately
$5.7 million plus interest. We recognized this amount during the fourth
fiscal quarter ended December 28, 2008 in litigation settlements on the
consolidated statement of operations. We intend to appeal any award of legal
fees.
Other
Settlements
During
the second quarter of 2009, we recorded $1.3 million of litigation expense
related to the settlement of a dispute with a consultant for $0.9 million and
the acquisition of a patent related to our Alpha business for $0.4 million. We
purchased the patent for $1.7 million related to our Alpha business. A portion
of this purchase price was attributable to use prior to the date of acquisition
and as a result we recorded $0.4 million in litigation expense and $1.3 million
in intangibles.
There
have been no material changes from December 28, 2008 to the significant risk
factors and uncertainties known to the Company that, if they were to occur,
could materially adversely affect the Company’s business, financial condition,
operating results and/or cash flow. For a discussion of the Company’s risk
factors, refer to Item 1A. “Risk Factors”, contained in the Company’s Annual
Report on Form 10-K for the year ended December 28, 2008.
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Exhibit
4.1
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Amendment
No. 2 to Rights Agreement, are hereby incorporated by reference to Exhibit
4.1 of the Registrant’s Current Report on Form 8-K, filed with the SEC on
August 5, 2009.
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Exhibit
31.1
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Certification
of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange
Act, as enacted by Section 302 of the Sarbanes-Oxley Act of
2002.
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Exhibit
31.2
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Certification
of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange
Act, as enacted by Section 302 of the Sarbanes-Oxley Act of
2002.
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Exhibit
32.1
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Certification
of the Chief Executive Officer and the Chief Financial Officer pursuant to
18 United States Code Section 1350, as enacted by Section 906 of the
Sarbanes-Oxley Act of 2002.
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Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
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CHECKPOINT
SYSTEMS, INC.
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/s/
Raymond D. Andrews
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November
5, 2009
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Raymond
D. Andrews
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Senior
Vice President and Chief Financial Officer
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EXHIBIT
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DESCRIPTION
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EXHIBIT
4.1
|
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Amendment
No. 2 to Rights Agreement, are hereby incorporated by reference to Exhibit
4.1 of the Registrant’s Current Report on Form 8-K, filed with the SEC on
August 5, 2009.
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EXHIBIT
31.1
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Rule 13a-14(a)/15d-14(a)
Certification of Robert P. van der Merwe, Chairman of the Board of
Directors, President and Chief Executive Officer.
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EXHIBIT
31.2
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Rule
13a-4(a)/15d-14(a) Certification of Raymond D. Andrews, Senior Vice
President and Chief Financial Officer.
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EXHIBIT
32.1
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Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 936 of
the Sarbanes-Oxley Act of 2002.
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